Economy in Brief: February 2023

Output in Europe continues to struggle as exemplified by German industrial production, that fell in December continuing its erratic pattern in 2022. German production has fallen in four of the last six months. Annualized growth rates, calculated sequentially, show output decelerating in German manufacturing with output down by 4.2% over 12 months, down at a 6.8% annual rate over six months, and down at an 11.7% annual rate over three months. The output of consumer goods follows that same progression, and the output of intermediate goods follows that progression but with much more severely negative rates of growth. Intermediate goods are down by 10.3% over 12 months, down at an 18.4% annual rate over six months, and down at a 24.6% annual rate over three months. The exception to all this weakness and progressive weakness is capital goods where output accelerated from 12-months, to 6-months, to 3-months, and where growth rates have become relatively strong. Capital goods output is up by 3.5% over 12 months, up at a 10.5% annual rate over six months and then up at nearly the same growth rate of 10.6% annualized over three months.

But the quarter is now finished; the quarter-to-date calculations are now for the fourth quarter. They show industrial production falling at a 2.7% annual rate, consumer goods output falling at a 4.7% annual rate, intermediate goods output falling at a 15.2% annual rate, and capital goods output expanding at a strong, 16.3% annual rate.

Construction shows a decline in output in December, and it shows sequentially declining and decelerating growth rates with output contracting and sequentially greater negative rates from 12-months to 6-months to 3-months.

Manufacturing Manufacturing orders are declining on all but horizons, but the declines are progressively diminishing with the 12-month growth rate for real orders at -9.6%, diminishing to -8.7% over six months, and diminishing further to -3.1% over three months. Real orders are not becoming progressively weaker; however, they are contracting on all timelines.

Demand shows that real sales have been somewhat erratic. They are up by 1.1% over 12 months, down at a 0.2% pace over six months, and then up at a 0.8% annual rate over three months.

Manufacturing and industry Various surveys show a slight amount of firming in the October to December period. The ZEW current index is slightly stronger for two months in a row. The IFO index for manufacturing also is higher for two months in a row. IFO expectations have been stronger for two months in a row. The EU Commission index for the industrial sector has been relatively unchanged over the past three months.

Elsewhere in Europe… Other early reporting countries in December show mixed results. France logs a gain in output of 0.3%, Spain shows a decline of 1.8%, Ireland shows a drop of 8.5%, Portugal posts a gain of 4.1%, Norway shows IP declining by 0.6% in December. The sequential growth rates show persisting decelerations for France, Ireland, and Norway. France, while showing persistent deceleration, still reports positive rates of growth over 12 months, six months, and three months. Ireland reports accelerating contractions over that timeline, while Norway transitions from growth over 12 months to a decline in output over three months. Spain’s pattern is inconsistent, while Portugal shows strength with positive growth rates on each horizon and with industrial output accelerating from 2.4% over 12 months, to a pace of 11.8% over six months and to 26.1% over three months.

Canada's Ivy index move sharply higher to 60.1 in January from 49.3 in December. The manufacturing index moved up to 51 from 49.2. The employment diffusion index moved up to 60.5 from 59.5. Delivery speeds lengthened, indicating some increase in activity rising to 52.3 from 49.1. Inventories, however, grew at a slower pace on a diffusion reading of 52.7, down from 53.9 in December. Inflation expanded more slowly with the diffusion reading for prices of 63.6 in January compared to 67.5 in December.

Over broader periods, three-months, six-months, and 12-months changes show that the overall Ivey index has moved up significantly, rising by 3.1 points over six months and by an even stronger 7.3 points over three months. In contrast, the manufacturing reading has eased, slipping to show a weaker gain over six months, falling back by 1.5 points while the diffusion index for manufacturing rose by 2.1 points over three months. The diffusion index at 51.0 (above 50) for January still shows bare-bones manufacturing expansion.

The employment diffusion index, while remaining well above 50, the point that indicates hiring neutrality, is lower by less than one point over 12 months but higher by 1.1 points over six months and by 5.9 points over three months. Delivery speeds have slowed considerably compared to 12-months ago. They are now nearly 25 diffusion points higher than they were 12 months ago; they're also 11.4 points higher than they were six months ago and 1.5 points higher than they were three months ago. Inventory diffusion is weaker on all three horizons, indicating that inventory building has steadily slowed. On the other hand, price diffusion is lower by 14.5 diffusion points over 12 months, by 12.3 diffusion points over six months and by 8 diffusion points over three months. The step back for inflation is impressive.

Meanwhile, the broader inflation metrics in the economy at the consumer level for consumer prices, for core consumer prices (excluding food & energy), and for the CPIx (a reading that excludes volatile items) all show inflation stepping down from 12-months to 6-months to 3-months.

The data on ranking allow us to look at the levels of these PMI readings and the pace of inflation across a broader period back to early-2009 and put today's performance in historic profile by looking at the queue standings (or ranking standings) that position each variable in a queue of historic values. The overall Ivey index has a 71.4 percentile standing, indicating that it's been higher than this a little less than 30% of the time. After the jump this month, the Ivey index is at a relatively firm standing. Manufacturing is a different ball game with a 34.7 percentile standing; it has been lower than its current value only about one-third of the time. The median readings on these rank variables occur at the 50% mark so any reading above 50 is above its median on this timeline any reading below 50 is below its reading on this timeline. The employment reading in January has a diffusion value of 60.5 and paired with a 92.3 percentile standing, indicating extreme strength for employment. Employment has been higher than the current level, less than 8% of the time. Delivery speeds have a high-ranking, indicating that the lags for deliveries are getting longer and that conditions are still relatively tight and have been tighter only about 8% of the time. Inventories, at a 52.7 diffusion reading in January, have a 48.2 percentile standing just slightly below their median. Prices have seen their diffusion values slide consistently. The 63.6 diffusion reading for January has a 57.1 percentile standing which puts it above its historic median on data back to 2009. But a reading at the 57th percentile is not as ominous for inflation.

The rankings for inflation itself showed that inflation at the consumer price level has rarely been higher than the year-over-year gains that are being posted in December. The headline CPI is at 6.5%; CPI less food & energy the gain is at 5.5%; on the CPIx the gain is at 5.4%. Consumer prices have a percentile standing of 94, indicating they have been higher only about 6% of the time; less food & energy prices have been higher on this timeline barely more than 1% of the time; the CPIx that excludes the volatile items has been higher about 6% of the time. Inflation remains high by historical standards on all these measures. In fact, it's breaking the lowest in the Ivey survey based on the diffusion measure for January. However, since inflation has rather substantially in January, we can compare the ranking of the Ivey PMI price index of 67.5 (from December) to its historic legacy and on the same timeline as the CPI data. On that a ranking at the 73 percentile emerges instead of at the 57th percentile and that's slightly more comparable to what we're seeing from the CPI data which are also up to date through December. Still, Ivey is pointing to ongoing deceleration ahead.