Economy in Brief: July 2022

German industrial production rose for the second month in a row in May. The headline for IP increased by 0.2% following an April rise of 1.3%. However, those two increases followed a substantial drop of 4.2% in March. As a result, the three-month annual rate decline in German industrial production is at a -10.3% annualized rate, the decline over six months is at a -1.6% pace and the decline over 12 months is -1.4%. German industrial production is declining; its decline is accelerating despite increases in output over the last two months

Monthly sector patterns
In May, consumer goods output fell by 0.9%, dropping for the third month in a row. Capital goods output rose by 2.2%, rising for the second month in a row, after a 3.7% increase in April. While that two-month string of increases seems impressive, it still does not get industrial production out of the hole since capital goods output in March fell by 7.8%. For intermediate goods, the output trend has been hot and cold: intermediate goods output fell by 0.4% in May, rose by 0.7% in April and fell by 3.3% in March

Sequential trends in IP by sector
Looking at these three industrial production sectors, what we see is clear deceleration. For consumer goods, output rises by 2% over 12 months, eases to a 0.4% rate of increase over six months and then falls at an 8.5% annual rate over three months. Capital goods also show clear sequential deceleration with a 0.2% decline over 12 months, a drop at a 3.5% annual rate over six months that accelerates to a decline at an 8.9% pace over three months. Intermediate goods do not show sequential deceleration per se; however, they do show declines over all three sequential periods. They log a 4.1% decline over 12 months, a smaller decline over six months, then register an 11.4% rate of decline over three months. While the six-month decline is not as severe as the 12-month decline, the weakness steps up over three months. In fact, over three months, intermediate goods output is weaker than any of the other sectors that are showing sequential declines.

Manufacturing output orders and sales
Manufacturing output, taken by itself, shows that output increased by 0.5% in May after a 1.9% rise in April. Those increases compare to a 4.8% drop in March. Manufacturing output in Germany shows sequential deterioration from a -1.3% annual rate over 12 months to a -1.9% pace of decline over six months to a -9.8% annual rate over three months. Real manufacturing orders also show persistent and sequential decelerations with orders falling by 3% over 12 months, following a 5.2% annual rate drop over six months, and then falling at a 21.1% rate over three months. Sector sales in manufacturing adjusted for inflation rise by 1% over 12 months, fall at a 1.2% pace over six months and fall at an accelerated 5.5% decline over three months. Sector sales adjusted for inflation also are showing this persistent deceleration. Reports on German output and on manufacturing are consistently weak and all the sectors and all these metrics show declines in the quarter-to-date as well.

Other German indicators
We can also look at some industrial indicators for Germany: there's the ZEW current index, the IFO manufacturing index, the IFO manufacturing expectations index, and the EU Commission industrial index. Some of these are net diffusion indexes and some of these are just raw indexes so that the raw index level month-by-month isn't necessarily meaningful when compared across indicators. But if we look at the average levels for all these variables and how they change, we see secular deterioration: all four of these industrial gauges (1) the German current situation, (2) the manufacturing situation, (3) manufacturing expectations, and (4) the EU industrial index – all get weaker from 12-months to six-months to three-months.

Indicators quarter-to-date
In the quarter-to-date, the ZEW current index weakens by 4.1 points and EU Commission index weakens by 0.2 points. However, the IFO manufacturing index increases by 0.7 points and the IFO manufacturing expectations reading improves by 1.6 points in the current quarter-to-date.

IP elsewhere in Europe
Other early-reporting European countries, three of them European Monetary Union members, report manufacturing IP for May. None of them show the sequential deterioration that we see in Germany. France shows a 2.2% gain its index over 12 months that accelerates to a 2.9% annualized pace over six months but then collapses to a 0.3% decline over three months Spain shows persistent acceleration. Sweden, an EU member, shows persistent acceleration. Portugal shows a 3.1% gain over 12 months, a decline in output over six months, then a stronger 9.7% annualized gain over three months.

Quarter-to-date trends
The German economy, the largest in Europe, is showing some of the weakest and consistently weakest results in May in the quarter-to-date. Other early-reporting European economies show mixed trends. France shows a decline in the quarter-to-date with industrial production falling at a 3% annual rate. However, Spain, Portugal, and Sweden all show increases in industrial production in the quarter-to-date as of May.

IP growth since Covid struck
Germany also shows declines in industrial production for its headline, for manufacturing overall, for construction, and for the three main manufacturing sectors compared to where these indexes stood in January 2020, just before COVID struck. However, among other European reporters, trends are more diverse. Industrial production in France is weaker than it was in January 2020. Portugal is weaker than it was in January 2020 as well. But both Spain and Sweden show industrial production stronger than the indexes were over two years ago.

The S&P global composite PMIs took a turn for the worse in June. Among a sample of 20 countries and regions, only seven improved month-to-month. That means nearly twice as many deteriorated as improved. However, among the twenty, there was only one observation with the diffusion value below 50 indicating that there was actual economic contraction in June - that occurred in Ghana.

Growth rules but slowing encroaches That set of generalizations is true over all the timelines in the table where we look at the most recent three months and we look at a period of three months, one of six months and another of 12- months, in each case, compared to earlier periods to assess the changes and the levels of the various composite PMIs. Looking at these various slices of time, there is no period in which more than three composite PMIs are below 50 at the same time. So, 17 out of 20 of these jurisdictions have diffusion values above 50, demonstrating that growth prevails in every one of these timelines. However, of the six comparisons (three individual months and three periods), there are three comparisons of period changes that show that more than half or half of the jurisdictions are slowing; two other periods show a significant amount of slowing while only one period - that period is the comparison of 12-months to 12-months ago - in which only a few of the jurisdictions are weaker than they were in the previous period.

The clear overview for the composite PMIs is that growth remains the order of the day although there is some significant slowing. There's slowing in 13 of 20 areas in June, 11 slow in May and seven slow in April. The tendency to slowing has been expanding in the last three months. On the other hand, looking at the net changes over three months we find that 9 jurisdictions have slowed, slightly less than half, but over six months 12 have slowed.

The table also gives us averages and medians for the PMI measures in the table over the last three months; the average has fluctuated between 53 and 55 while the median has been between 52.7 and 55.8. For this group of 20 countries, these are moderate or normal composite PMIs. Over three months, six months and 12 months, the averages fluctuate between 53.7 and 54.4 with the median fluctuating between 53.8 and 54.9, looking at the same sort of range.

High-low percentile standings The average percentile standing in June for the various countries is a 79.9 percentile standing while the median is at 81.5. These percentile standings place the current PMI value for each country or region in a percentile positioning in its high-to-low range of values since January 2018. So that on this period we see that when placed within the range of recent values current performance is relatively closer to the top of the range than to the bottom. However, the second ranking statistic, and the one I prefer, is the queue standing.

Queue percentile standings The queue standing places the current observation expressed as a percentile standing among all observations from January 2018 to date – not just positioning it between the highest and lowest. It is an ordinal measure which is what the headline ‘queue’ stands for; it tells you whether the current value is at the head of the queue or at the end of the queue or near the middle. For both the average and the median we see very middle of the road queue percentile standings. The average is at its 50.2 percentile while the median is at its 52.8 percentile. These queue standings (or ranking statistics) position the current crop of PMI readings near the middle of the distribution they had occupied during this period. That assessment abstracts from the particular level reading is this month. It is the ranking that places the current observation as a position and its queue of historic data and focuses our attention on its relative position rather than on the absolute value of diffusion itself. That gives the reading much more context.

When we put these various findings together, what we see is that we have a group of twenty countries whose current performance is what it has been on average since early-2018. We see that recently there has been some tendency for the composite PMIs to register slower growth. And not surprisingly giving these middle sorts of ranking assessments, there are very few members of this group that show contracting growth. In fact, over the various time segments, we look at here there have been very few that have shown contraction. Still, there are seven jurisdictions with queue standings below – and in some cases well below - their respective historic medians. The U.S. and Germany are among countries with PMI queue standings in the lower one-quarter of their queue of observations since January 2018 - that is not reassuring.