Economy in Brief: 2022

Japan's Tankan report slipped in the first quarter of 2022 as the bellwether manufacturing rating fell to 14.0 from 17.0 in the fourth quarter of 2021. Nonmanufacturing slipped to 9.0 from 10.0. On the same timeframe, the total industry reading fell to 11 in Q1 2022 from 14 in Q4 2021.

Weak levels for the Tankan The absolute level of the readings for Q1 2022 are not particularly solid. For manufacturing, the percentile queue standing is at 66.7% that leaves it at the border of the top third of its queue of values- that's a reasonably firm, but not very impressive standing. For nonmanufacturing, things are much worse. The nonmanufacturing percentile standing is at its 39.4 percentile, leaving it substantially below its median. The median occurs at a ranking of 50%. Together these two measures leave the total industry percentile standing at the 43.9 percentile, also significantly below its historic median.

Lost momentum, turned negative, too The Japanese economy has slipped. The levels of the Tankan are not impressive and perhaps even somewhat disturbing to the policy officials there. A look at the sequential pattern in the table shows that there has been weakening; there's a weakening from Q3 to Q4 from Q4 2021 to Q1 2022, although the first quarter readings for 2022 stands above or at the same level as they did in Q2 2021.

An uneven set of readings and their impact On balance, the Tankan gives us a view of the Japanese economy that shows it slipping. It has already reached levels that are not very strong by the standards of the Tankan survey. At the same time, the Bank of Japan is struggling to keep control of interest rates and the yen has backtracked significantly on foreign exchange markets. The drop in the yen is a mixed blessing as a weaker yen makes Japanese goods cheaper overseas and that provides export stimulus for the economy. However, Japan has shuttered its nuclear reactors now and is importing a great deal of oil; oil is priced in dollar terms. Any weakness in the yen is going to make Japan's energy imports even more expensive at a time that energy is already very expensive. In addition to that, anything that Japan imports from the dollar sector is now going to be more expensive.

The final column in the Tankan table shows changes in the indexes from Q1 2020. Manufacturing is up by 22 points on this timeline but nonmanufacturing is up by only one point. Total industry is up by 11 points on this timeframe benchmarked to just before the start of Covid globally.

Services industries Turning to the details in this report, looking across various service sector industries, only wholesaling has increased its assessment quarter-to-quarter moving to a value of 20 in Q1 2022 from 17.0 in Q4 2021. The transportation rating at -2 is equal to its reading in Q4 2021. Comparing the levels of the readings to their values in Q1 2021, we see that most of the industry responses are higher: construction and real estate are exceptions. If we look at the queue percentile standings, in Q1 2022, we get a glimpse of the kinds of businesses that have been hurt the most in the post COVID period. Restaurants & hotels and personal services scrape the bottom of the barrel with lower 10 percentile or weaker standings. Also extremely weak is transportation at a 31.8 percentile standing and retailing at a 36.4 percentile standing, along with real estate at its 37.9 percentile standing. Construction is only slightly better off at a 47 percentile standing, but it is still below its historic median. Showing some strength are services for businesses at an 87.9 percentile standing; wholesaling registers an 81.8 percentile standing. These are relatively strong readings indicating some degree of health in those sectors.

The far-right hand column shows the changes in these sectors since Q1 2020; there is an outsized increase in wholesaling of 27 points, retailing improved by 9 points, transportation improved by 5 points, and services for businesses improved by 3 points along with restaurants & hotels. However, personal services, real estate, and construction are all lower on that timeline comparison with their assessments of two years ago.

Outlook darkens The outlook portion of the survey weakened sharply quarter-to-quarter. The manufacturing outlook slipped to 9 in Q2 2022 from 13 in Q1 2022; the nonmanufacturing outlook slipped to 7 from a reading of 9; and for overall industry, the outlook stands at a value of 8 compared to 10. The queue percentile standing for these readings put the manufacturing outlook at its 56.1 percentile standing, slightly above its historic median. For nonmanufacturing, the 37.9 percentile standing leaves it well below its historic median; the all-industry standing is at its 42.4%, also below its historic median. If we compare the manufacturing outlook for Q2 2022 to the outlook for Q3 2021, it's lower significantly and the outlook for all industry is unchanged with the nonmanufacturing outlook being the only one that has improved on that timeline.

In summary, there's a lot of weakness in the Tankan report. There's a loss of momentum, there's weakness across the board, there's a loss of momentum across the board, and there's a reduced outlook for the period ahead. Japan's policymakers are looking at the potential for a fiscal stimulus package which makes a lot of sense given this weak report. Japan's economy continues to struggle.

In February total industrial production in Japan rose by 0.4%, reversing several months of declines. In January industrial production fell by 0.7%; in December it fell by 0.8%. That contrasts to the month previous to that as output had been up very strongly in November.

Total industrial production has an uneven trend with a tilt toward the deceleration. At a 0.7% growth rate over 12 months that elevates to 1.7% over six months but then turns lower over three months as total industrial production declines at a 4.5% annual rate.

Similarly, for manufacturing output, an increase posts in February with declines in January and December. Over three months there's a decline at a 6% annual rate that follows an increase at a 3% annual rate over six months and compared to a gain of only 0.3% over 12 months. Manufacturing shows a tendency to decline. The sharp negative growth rate over three months gives the series its demeanor but trend is not monotonic and therefore not clearly determined.

Select industries The two industries in the table, textiles and transportation, show uneven and inconsistent monthly patterns as well as divergent sequential patterns. Textiles do show a progression toward acceleration while transportation shows an inclination toward weakness mostly based on the steep minus 20% annual rate decline over three months.

Sector trends By product group or sector, the trends once again are uneven: consumer goods and intermediate goods follow the trend of overall industry showing declines in December and January and a slight rebound in February. Investment goods show a decline in December, an increase in January and a small decline in February; these results translate, once again, into mostly uneven sequential trends. For consumer goods, there's a 1.8% rate decline over 12 months, a sharp 10% rebound over six months, then a 6.5% annual rate decline over three months. For intermediate goods, there's a 1.0% increase over 12 months, another 1.0% increase at an annual rate over six months and then a 4% annual rate decline over three months. Investment goods show a clear trend that is weakening as growth is at 1.2% over 12 months, declining to a -2.3% pace over six months then eroding further to a -4.9% rate over three months.

Mining shows sequential growth rates that are clearly deteriorating and logs a -9.6% annual rate decline over three months. Electric & gas utilities show the opposite trend, with a 16.3% surge in output over three months.

Quarter-to-date The quarter-to-date trends show for overall industrial production a rise at a 4.6% annual rate and in manufacturing a rise at a 4.2% annual rate. By sector, consumer goods are up at a 4.6% annual rate, intermediate goods at a 4.4% annual rate and investment goods by 3.0% at an annual rate. Mining, however, shows declines in double digits at a -12.7% pace. Electric & gas utilities show an increase at a 22.7% annual rate.

Since Covid... The changes since January 2020, a reference point over two years ago, underline how weak conditions in industry have been in the intervening period. Total industry output is down 2% on balance over that timeline. Manufacturing output is down by 3.1%. Consumer goods output is down by 7%, intermediate goods output is down by 1.3% and investment goods output is down by 0.6%. Since January 2020, mining output is down by 7.5%; however, electric & gas utilities have output up by 7.8%.

Italian industrial production in manufacturing fell by 3.4% in January following a 1.1% decline in December and a 1.5% gain in November. This series for manufacturing industrial production declines at 11.6% annual rate over three months, at an 8.3% annual rate over six months, and at a 2.4% annual rate over 12 months. Italian industrial production is sequentially decelerating: the more recent, shorter-period growth rates are weaker than the longer growth rates indicating progressive deterioration in Italy's manufacturing sector momentum. The current observation is for January 2022; with one month into the new quarter, industrial production is falling at a 20% annual rate early in 2022 Q1.

Sector trends Declines in January permeate the index; there's a 3.6% decline in consumer goods output, a 1.6% decline in capital goods output, and a 3.4% decline in the output of intermediate goods. In December, the weakness is widespread again this time with consumer goods output flat and with a 2.2% decline in capital goods and a 0.6% decline in intermediate goods. In November, conditions are slightly more mixed, but more upbeat, with consumer goods output down by just 0.2%, capital goods output up by 2%, and intermediate goods output up by 0.7%.

However, looking at the table, there are still sequentially deteriorating rates of growth for consumer goods and for intermediate goods in which the shorter, newer growth rates continue to show weaker and weaker results. The exception is for capital goods but it's not much of an exception because for capital goods there is a 12-month decline of 2.8%, over six months a decline at a 7.7% annual rate over emerges, and over three months that is only slightly improved to -7.1% - but that's still a severe downturn. It's still a rate of decline that's much greater than the 12-month rate.

Quarter to date Consumer goods are declining at a 20.2% annual rate in the quarter to date. Capital goods output is declining at a 13.5% annual rate in the quarter to date while intermediate goods are declining at 19.7% annual rate. Obviously, the quarter-to-date data show severe and consistent weakness across sectors; there really isn't any exception and there isn't a strong sector.

Transportation There are separate figures for the transportation industry, and there is some strength there. Transportation shows gains month-to-month in January, December and November. Transportation output is accelerating with the -1.3% change over 12 months, a 1% annual rate gain over six months and a huge 26.5% annual rate gain over three months. However, even with this sector embedded in the totals, manufacturing continues to decline into show sequential weakness.

Other industrial measures The manufacturing PMI declined by 5.9% in January; it declined by 1.3% in December but did make a 2.8% increase in November. However, there is sequential deterioration as the manufacturing PMI goes from a gain of 5.7% over 12 months to a declining pace of 6.5% over six months and the declining pace accelerates to 17.1% annualized over three months. The PMI reinforces news from the headline showing weak output and progressively weakening output. The EU Commission statistics on industrial confidence for Italy are contrary to this; they show a 12-month level of confidence at 6, over six months they show average confidence higher at 9.2, and the three-month average is at 9.9. All of these are averages so according to the EU data industrial confidence in Italy has been progressively improving. However, industrial output percentage changes in totals as well as by sector, show the opposite: progressive deterioration. Also, the Italian manufacturing PMI from Markit shows progressive deterioration. The EU confidence measure must be picking up abstract optimism not on-the-ground reality.

And there is inflation... On the same timeline, there's, of course, rampant inflation and it is rising because of supply problems because of high oil prices and for Italy we see a 13% annual rate over 12 months, we see another 13% annual rate over six months and that climbs to a 14.6% annual rate over three months. Italian inflation shows a slight tendency to accelerate; it clearly is stuck at a very high level. In the quarter to date, it's up to a 17.5% annualized pace. Inflation continues to be a problem in the industrial sector for Italy as it is in much of the rest of the world.