Economy in Brief: November 2022

Industrial output for manufacturing in Italy fell by 1.4% in September after increasing by 0.5% in July and 2.4% in August. Italian output is flat over 12 months, falls at a 0.2% annual rate over six months and then posts this strong 5.8% annual rate of increase over three months. September’s drop interrupts a pair of gains in July and August to blunt the three-month gain which itself is an interruption of an incipient declining trend sequential trend.

Quarter-to-date growth September marks the end of the quarter so the quarter-to-date calculations give us the preliminary quarterly results for Italian industrial output. Manufacturing output is declining at a 0.2% annual rate in the quarter; the decline led by a 7.6% annual rate decline from intermediate goods, reinforced by a 2.7% annual rate decline in consumer goods output, but with capital goods softening the blow with a substantial 6.1% annual rate of increase in the third quarter.

Monthly data show one decline in the last three months for consumer goods output- that was in July. Capital goods show increases in each month of the quarter. Capital goods output is the weakest gain rising at a 0.1% month-to-month in September, after rising by 1.9% in August and in July rising by 2.2% month-to-month. Intermediate goods output is down by 1.8% in September, after rising by 0.8% in August, and after a decline of 0.7% in July.

Manufacturing trends are mixed across sectors Over the sequential period from 12-months to 6-months to 3-months, Italian output shows very different trends in train by sector. For output overall, there's no change over 12 months, a slight decline over six months and then strength over three months leaving this series without a clear trend in place. Consumer goods follow that same sort of pattern with a 3.4% gain over 12 months, a 1.1% annual rate increase over six months and a strong 7.4% annual gain over three months. Consumer goods output does not give any clear sense of trend, but it does show increases on all three horizons. Capital goods show increases on all three horizons and clear acceleration. Capital goods output rises at a 2% annual rate over 12 months, at a 2.5% annual rate over six months, ballooning to an 18.1% annual rate gain over three months. However, intermediate goods bring these trends back to earth with a 4.9% annual rate decline over 12 months, the same 4.9% annual rate decline over six months, and a decline of 6.8% at an annual rate over three months. These results leave the manufacturing trends mixed and the sector trends in some cases moving in opposite directions. It all adds up to no clear signal from manufacturing.

Since COVID… output lethargy Manufacturing has been weak since COVID struck. The aggregate increase in Italian output has been only 0.1% since January 2020 with consumer goods output up by 1.2%, capital goods output up by 0.6% and intermediate goods output lower about 1%.

Sector rankings With those kinds of trends, it's surprising that the rank standing for the 12-month changes in output are as strong as they are. For output overall and data back to the year 2000 show manufacturing output growth has a standing in its 52.7 percentile. Consumer goods have a standing in their 85.6 percentile- quite strong. Capital goods have a standing in its 60.6 percentile. Intermediate goods once again provide the counterpoint with a much weaker standing, in its 18.2 percentile - a standing clearly below its historic median which occurs at a ranking of 50%. Strength and weakness in manufacturing appears to be a tug of war between solid performance in the consumer sector and weak performance from intermediate goods.

Italian industrial indicators Three industrial indicators for Italy provide a bit more context as to industrial performance. The EU industrial confidence index, the ISTAT current orders and the ISTAT outlook for production, provide these references.

EU industrial confidence: The EU industrial confidence measure has negative readings for July, August, and September; these readings gradually erode over this sequence of months. The averages for the sequential readings, however, show improvement from -12.1 over 12 months to an average of -8.3 over six months to an average of -6.3 over three months. Still, in the quarter-to-date EU industrial conference had a negative reading; it is up by only 1.2 points since COVID struck. The ranking for industrial components is done on the level of the index (a net diffusion index); on that basis it has a 41.1 percentile rank standing, below its historic median.

ISTAT current orders: The ISTAT current order series (a net diffusion index) shows negative numbers in each of the last three months but negative numbers that transit toward less weakness moving from -7 in July to -2 in September. Sequentially, over 12 months, six months and three months, the sequential averages are barely changed. Compared with the level in January 2020 before COVID struck, current orders are higher by 11 points and, ranked on data from the year 2000, the current order series has a 79.5 percentile standing, a relatively high reading for orders.

ISTAT production outlook: The production outlook index shows negative readings declining from -3 in July to -6 in September with an improvement in August in between. The sequential averages show a 12-month average of -18, a six-month average of -8 and a three-month average of -9 indicating there has been some improvement over three and six months compared to the conditions that prevailed over 12-months on average. In the quarter-to-date, the index has a reading of -4.3. Compared to the level since before COVID struck, in January 2020, the outlook is lower by eight points. The rank standing for the level of the orders index in September is at its lower 11th percentile, a very weak reading.

The OECD leading indicators this month are painting an extremely weak and worrisome picture of the world economy spanning both developed and developing economies. The overall OECD measure declines in October and September. It declines on balance over three months, and it declines on balance over six months. The index does increase by 1.9% over 12 months. In fact, all the major aggregates on the OECD index have that same property that they increase over 12 months and decline on the other horizons. Among developed economies, Japan is the sole exception and Japan shows a flat October and a flat September; its index declines over three months and declines over six months and logs a 1.5% increase over 12 months.

The U.S., the largest of the OECD economies, logs an index decline in October and September; the index declines over three months and over six months although its three-month decline is less than its decline over six months and the U.S. index increases by 1.8% over 12 months. That is still much more weakness than it is mixed.

As a further reference I take these OECD measures and I rank them measures historically for the whole of the OECD, the level standing has been this weak or weaker 7% of the time, the top seven OECD economies have been this weak or weaker about 7% of the time. The euro area has been this weak or weaker 5.5% of the time. Japan has been this weak or weaker 54.5% of the time and is the only country above its historic median on this timeline. The U.S. has been this weak or weaker about 14% of the time.

Looking at changes in the six-month averages which is one of the preferred ways to look at the performance of the OECD data, we find declines in October and September. Over the recent six months the previous six months we find declines. For 12 months ago the six-month decline was showing increases although smaller increases than for most of the other OECD aggregate metrics.

Looking at the OECD amplitude adjusted indicators, we see four months of a steady diet of indicators for the 12 entities the table including developed economies and economic units that include both the OECD, the OECD7, and the European Monetary System all with values below 100 indicating growth is subpar in all these regions and countries. The sole exception to this is Japan. However, when we look at the ratio of the current index compared to six-months ago in Japan produces a ratio below unity which indicates a slowdown in progress along with the other readings in the table.

The queue or ranked standings of these countries and areas are applied to their levels and shows readings below the 50% mark for all countries except for Japan and Germany. France has a reading at its 45.9 percentile but after that there was no reading above its 20th percentile except for China in its 20.2 percentile. The readings are weak; the momentum is weak; weakness simply abounds, and all the OECD area is affected across its most developed economies.

Retail sales in the European Monetary Area rose by 0.4% in September after being flat in August and falling by 0.2% in July. Still, it's only a one-month reprieve and the outlook doesn't necessarily look that bright in the wake of this unexpectedly strong report that substantially rides on the back of a stronger German report. Germany that carries a very high weight in the European Monetary Union had a gain in retail sales on the month of 0.9%.

Sequentially, the growth of retail sales in the euro area falls by 0.3% over 12 months that transitions to a 2.1% decline over six months but then sales log a gain at a 1.1% an annual rate over three months.

Separately, motor vehicle sales rose by 2.1% in September after rising by an outsized, 19.2%, in August. Motor vehicle sales experienced explosive acceleration logging a 10.7% growth rate over 12 months, a 71.8% annual rate gain over six months and a 112.5% annual rate gain over three months. Computer chips are becoming available again and cars are being produced and sold. That's a major factor in boosting motor vehicle sales in the euro area area as well as in the United States and elsewhere.

Q3 sales data are complete This retail sales report marks the completion of retail sales in the third quarter. According to data statistics for this report are therefore completed third quarter statistics on a preliminary basis. Eurozone retail trade falls at a 2.9% annual rate in the third quarter with motor vehicle registrations up at about a 100% annual rate. In the quarter-to-date of the 6 early reporting European monetary union countries (Germany, Italy, Spain, Portugal, the Netherlands, and Belgium), there are quarter-to-date gains in sales for three of them. Italian sales are up at a 4.9% annual rate in the quarter-to-date, in Portugal sales are up at a 1.3% annual rate, and in Belgium they're up at a 0.8% annual rate. These gains contrast to a 4.2% annual rate decline in Germany, a 7.3% annual decline in Spain, and a 6.3% annual rate decline in the Netherlands.

The table also includes quarter-to-date sales for Denmark, an EU member, Sweden, Norway and the United Kingdom. Danish quarter-to-date sales are falling at a 5.3% annual rate, Sweden lags a nearly 17% annual rate fall, in Norway sales fall at a 7.7% annual rate. In the U.K., sales volumes fall at a 7.3% annual rate. Not only does the EMU headline show quarter-to-date decline, but the preponderance of retail sales data across European Monetary Union and non-monetary union members show sales falling in the quarter-to-date.

Lumping all the sales together, across the ten countries reporting in the table, finds only three show gains over 12 months; those three are EMU members Italy, Spain, and Portugal with Spain logging an increase of only 0.1%. Over six months there are increases in only 3 countries: Italy, Spain, and Belgium – all EMU members. Over three months there are gains in five of the ten reporting countries with one country Germany showing unchanged real sales over three months.

Sales since Covid came to town Looking at the gain in sales in the EMU since January 2020, before the COVID virus struck, sales have risen by 4.2% over that 33-month period. Despite recent strength, motor vehicle sales are still 15.2% lower than they were in January 2020. Sales growth has not been very strong in Europe, rising quickly after the drop-off during the Covid recession, then slowing abruptly.

Sales in Italy are up 6.7% over this period; in Belgium they are up 5.4%; in Norway sales gain 4.4%; in Germany sales rise by 3.5%; in the Netherlands sales are higher by 2.3%. Then Portugal, Denmark and Sweden show gains less than 2% each, while Spain and the U.K. log sales totals lower on balance over that period.

Retailing may be a bright spot this month. But it does not have good momentum or good fundamentals. With the energy picture in Europe so uncertain and with the ECB still fighting a too-high inflation and hiking rates, September could prove to be a Pyrrhic victory for good news on the retail sales front.