Economy in Brief: June 2022

Italian manufacturing industrial production rose by 1.5% in April on a strong gain in the intermediate sector of 2% and a solid gain in the consumer sector of 1.6% while capital goods output remained flat month-to-month. Over the last three months among these three sectors, there was only one month in which a sector’s output declined - that was a 0.6% decline in intermediate goods output in March.

Recent strength meets longer lasting breadth This strength is part of an ongoing process in Italy where 12-month output is up by 3.7%, six-month output is up at a 6.2% annual rate, and three-month output is up at a very strong 25.5% annual rate. Industrial output in Italy is accelerating across these horizons and what's more it is accelerating in each of its major sectors: consumer goods, capital goods, and intermediate goods.

Strength in growth no matter how you cut it Over 12 months the strongest sector is consumer goods on a gain of 9.7% with capital goods the weakest on a gain of just 0.5%. Skipping ahead to three-months, the strongest sector is consumer goods on a gain of 38.1% at an annual rate, followed by intermediate goods at a 21.6% annual rate followed by capital goods at 13.6%. These trends show that Italian output has been strong in the current month, in the last few months, and has been accelerating over the last year across all three major industrial sectors. This is a very strong showing.

Adequate to very strong standings If we rank the industrial sectors based on year-over-year growth rates, Italian performance ranges between adequate to strong. At 3.7%, manufacturing output year-over-year has an 80th percentile ranking on data back to 2000. That's a top 20% position, which is strong. Consumer goods output, running at 9.7% over 12 months, has a 97.7 percentile standing and that is excellent and extremely strong. Intermediate goods output, with a 2.0% increase over 12 months, has a 66.7 percentile standing; that's a top one-third ranking for the sector and that is a solid performance. However, capital goods show an increase of just 0.5% over 12 months; that performance has a ranking of 48.9% which puts it just about one-percentile point below its median on this timeline. Growth at the median is adequate but no more than that. So, when we evaluate the growth rates for Italian production across sectors, the bottom line is that growth by sector ranges between adequate to quite strong.

Great results but are they sustainable? The second part to the story about ranking is that, of course, the three-month growth rates are going to rank a lot higher. And so will the six-month growth rates. Italian industrial production looks very-solid over 12 months and then, because of the increasing growth rates, it's looking stronger and stronger over these shorter periods. The question is whether Italy will be able to sustain this kind of increase in output given the challenges in Europe.

Other metrics are not so glowing... Manufacturing PMI: The Italian manufacturing PMI (S&P Global) has been slipping during this period. It has declined from a 12-month average of 59.8 over 12 months to average 58.6 over six months to a 56.2 average over three months. The index has further slipped from February to March to April although the April level for the manufacturing PMI is still a solid 54.5 reading. What we see in looking at the PMI data is that the trends are opposite to those that we get from looking at the performance of industrial production outright. And that could be something to bear in mind when considering trend and future performance.

EU and Istat surveys: Other indicators for Italy like the EU industrial confidence index, current orders from Istat and the Istat outlook for production also are less upbeat. These surveys show withering responses from 12-months to six-months to three-months but fail to do so sequentially – they do so only indicatively. However, the levels of the indexes generally are still strong: the rank standing of the EU industrial confidence index is strong at its 87.5 percentile. The Istat current orders reading has a strong 95.1 percentile standing. However, the outlook for production from Istat has only a 30.4 percentile standing, a standing that has been weaker only about 30% of the time. That is worrisome.

For the pessimists, the race is on. Who can project the gloomiest scenario? The OECD sees growth slowing. The World Bank has just released a report in which growth slows and inflation is stubborn and -gasp- is stagflation back? Ray Dalio of Bridgewater is making waves with a forecast that the Fed will have to cut rates again in 2024! Really?

That forecast is being 'sold' as something controversial. But if central banks are hiking rates in 2022 as many are, it would not be surprising that they would be cutting them in 2024- would it? How long do tightening cycles last anyway? I really don't see the controversy, but part of the talent of being widely quoted is selling a new sizzle on an old steak.

Apart from marketing, however, we have some news about monetary policy that should give you pause. And the drumbeat of talk about stagflation cannot be dismissed.

Stagflation refers to a period in which inflation remains high as growth weakens (stagnation + inflation = stagflation). We experience some 'stagflation' in just about every recession as growth falls and inflation remains high. The difference is that recession tends to 'cure' inflation and then recessions end and growth resumes. The sobriquet 'stagflation' is meant to describe a longer-lasting period of 'too-high inflation' coupled with 'too-low growth.' So, the question is whether that is on offer or not. Is it?

Japan's GDP contracted by 0.5% annualized in the first quarter of 2022. That puts the four-quarter growth rate at 0.7%, only slightly stronger than the same growth rate for the fourth quarter, which registered a 0.4% gain. GDP growth in Japan continues to simmer down after the stellar 7.4% 4-quarter growth rate posted in the second quarter of last year as the GDP comparisons for four-quarter growth was with a COVID interrupted period of a year-ago at that time. The annualized quarter-to-quarter growth rates show steadier performance.

Private consumption in the first quarter rose by 0.2% (annualized), a sharp step back from the 10.1% annual rate that it logged in the fourth quarter. Still, private consumption is up 2.1% year-over-year, better than the 1.3% pace logged in the fourth quarter.

Public consumption in Japan rose at a 2% annual rate in the first quarter after falling by 1.1% pace in the fourth quarter of last year. Public consumption has been solid since 2021-Q2 when it grew at a strong 3.2% pace followed by a 4.5% annualized rate in Q3. The second and third quarters of last year relied on government spending to stabilize the economy after a pullback of -3.0% annualized in 2021-Q1. Year-over-year public spending has been steady and strong at growth rates ranging from 3.4% to 2.0% since 2020-Q4; the only exception was the weak 0.9% four-quarter gain in 2021-Q4

Gross fixed capital formation in Japan continues to be challenged; it fell at a 5.7% annual rate in the first quarter, marking the third quarter in a row with that series declining. There are negative four-quarter growth rates for gross fixed capital formation in five of the last six quarters. Capital spending is weak and uneven in Japan in the face of a difficult international trade environment. Confidence simply does not seem to be present.

Spending on housing continues to fall in the first quarter, marking the third straight quarter-to-quarter negative growth rate. The Q1 contraction is at a 4.8% annual rate; it's a faster contraction than the -4.5% logged in the fourth quarter although not as severe as the -6.6% contraction logged in the third quarter of last year. Housing is another sector that continues to be challenged with year-over-year growth rates negative in five of the last six quarters.

Exports grew at a 4.6% annualized rate in the first quarter (annualized) but were dominated by imports that grew at a 13.9% annual rate - this mix generated a negative contribution to GDP from net exports. Export growth is up at a 4.6% annual rate over four-quarters but has slowed steadily from its 27.1% pace in the second quarter of last year. Imports log a four-quarter growth rate at a 7.2% annual rate in Q1 of 2022. The year-on-year import trend is a bit muddier than the trend for exports. But exports have steadily outpaced imports on growth over 4-quarters until this report.

Domestic demand in Japan is satisfactory at a 1.2% annual rate quarter-over-quarter; it is down from the 3.6% pace logged in the fourth quarter in terms of quarterly growth rates. Domestic demand has positive growth in three of the last five quarters in quarter-over-quarter comparisons. Year-over-year growth rates for domestic demand show a 1.2% pace in the first quarter and that's up from 0.3% in the fourth quarter and 0.6% in the third quarter of last year, but that gain is shy of the four percent pace logged in the second quarter.