Economy in Brief: February 2022

Italian IP was set back in December, shedding about half its gain from November that was itself a rebound from a decline in October. The headline for IP now shows an erratic recent pattern across months and sequential growth rates over 12 months to six months to three months that show steady deceleration. Moreover, the decelerating patterns permeate the three main sectors of IP: consumer products, capital goods and intermediate goods. Italy's slowdown is broad-based across manufacturing (although the transportation sector bucks the trend on strong growth in output over the last three-months- both for three months on balance as well as for each of those three months).

The chart lays out a slightly different path and shows how Covid has dominated the recent behavior in IP, crushing it in April 2020 and then that deep depression in the timeseries laid the groundwork for the spike in April 2021. Emerging from all these distortions, IP has since settled down. IP, often a volatile series in the best of times, has logged increases month-to-month in eight of the last 13 months with one month showing no change in output. That puts the monthly expansion contraction ratio at 2:1. Over that stretch, the average monthly percentage change in output has been 0.4% which is quite good since IP data are expressed in real terms.

However, three of those monthly drops have come in the last five months as well as one month of unchanged output. There has been only once increase in five months, in November. In fact, November saw the first increase in output since June 2021. Clearly momentum is authentically being lost.

In the quarter-to-date (QTD – which is now a completed Q4 reading), output is falling for the headline and for all sectors except consumer goods. The consumer goods rebound may reflect catch up more than strength; consumer goods and capital goods are the only major sectors with output in January 2022 still lower than it was in January 2020. However, the consumer goods sector has been strong. Consumer goods is the only sector that despite slowing sequentially logs no negative results and posts the strongest gain of any sector over six months and 12 months as well as over three months.

Assessing output growth over 12 months using historic results back to January 2000, year-on-year manufacturing trends rank strongly. The headline is at 83.7% and consumer goods stand at their 97.3 percentile. Capital goods, at their 51.1 percentile, are barely above their historic median (that occurs at a 50% ranking). Intermediate goods stand at their 70.5 percentile. Manufacturing growth is doing well over 12 months, but it is decelerating.

These ratings on actual output reinforce the message from surveys on industry and business in Italy for the same span. The EU industrial confidence reading has been higher on this timeline less than 3% of the time. Current orders for Istat have been stronger less than one-half of one percent of the time. The Istat outlook has been stronger only about 15% of the time. Surveys reinforce the current IP readings on strength.

The three indicators at the table bottom show very strong gains over 12 months but revert to much smaller gains over six months and three months. That is not surprising since these rankings presented here are for these indicators as levels and levels have not changed very much over three months or six months. The surveys show levels about as high as they have ever been (see rankings), a least for two series. It is natural that when a diffusion survey approaches such a height its gains slow.

The message here is that Italian industry still has strong output and confidence, but that momentum has been ebbing. There is no pessimism here. There may still be lingering concern about what the virus will allow going forward, but sector diagnostics remain upbeat.

Japan's economy watchers index for January fell sharply with the current index falling from 57.5 in December to 37.9 in January. The future index fell as well, shedding its 50.3 reading in December in return for 42.5 in January. The current index fell month-to-month by 19.6 points while the future index fell by 7.8 points. On the face of it, the current index fell more sharply. But on closer inspection, it didn't. Ranking all month-to-month changes in the current and the future headline indexes over the last 100 months puts the monthly change for the current index in its lower 38th percentile- it falls more than this month to month about 38% of the time. However, for the future index, a drop of 7.8 points month-to-month or more occurs only about 14% of the time. So, the drop in the future index is actually rarer and shaper when compared to historic tendencies. Japan's economy watchers have not only discounted current performance but have done so with a significantly darker view of the future. This is not a one-off decline that takes the current reading lower but envisions a relatively quick rebound. It is something much darker.

Apart from the month's changes, the standing of the current index is now quite low, in the lower 13th percentile of its historic range of values; the future index is a slightly stronger at its 20th percentile. In the current array of standings, corporate manufacturers have the strongest percentile rankings followed by nonmanufacturing corporations with the overall employment ranking coming next. Corporations generally fare better than business by specific industry. This suggests that smaller businesses may be seeing more weakness.

As for the outlook, corporations involved in manufacturing are strongest by a large margin followed by assessments of employment and, after that, expectations for eating and drinking places. This ranking is quite different than for the current rankings.

The eating & drinking places ranking switch- and by that I refer to the industry being the weakest current assessment and yet the fourth strongest assessment in the future profile- looks like a classic response for a period in which Covid has struck depressing current conditions but not denting the expectations for the future by as much. And indeed, eating & drinking places have lost 42.2 diffusion points of value in the current index over last three months shedding 40 of them in January alone. Meanwhile, the future reading fell by about seven points month-to-month but has lost 17 points over three-months. Services lost about 30 points month-to-month in the current reading and 9 points in the future reading. Services lost 28.8 points over three-months in the current framework compared to 18.6 points in the future. But unlike eating & drinking places, services rank 9th in the current index setting and even weaker at 10th in the future setting. By ‘ranking' I refer not to ranking the raw diffusion reading values, but to ranking the components again on their queue standings (or timeseries ranking) presented in the last column of the table. Each industry should be ranked relative to its own historic experience. Diffusion value levels cannot be directly compared and even changes month-to-month need some perspective (as we saw at the top of this report).

On balance, we see that Japan's economy watchers index is weak in January. It shows some elements of a Covid strike (weak current reading with less weakness in the future); at least there is that effect on display for eating & drinking places (it is unique among sectors in that regard). And there is some resilience for manufacturing, for corporations generally and for the current situation as well as for the evaluation of employment. But the service sector broadly shows more concern about the future. Japan, like everyone else, has worries about the Covid virus, but its concerns about the future appear to be more deeply seated.