Economy in Brief: March 2022

Italian industrial production for manufacturing (IP) fell by 3.4% in January. This is the second decline in a row for manufacturing industrial production. In December, IP had fallen by 1.1%. All major sectors’ industrial output fell in January. Consumer goods output fell by 3.6% month-to-month, capital goods output fell by 1.6%, and intermediate goods output fell by 3.4%. None of these sectors showed increases in December either. However, in December, consumer goods output was flat while capital goods output fell by 2.2% and intermediate goods output fell by 0.6%.

With this sort of weakness over the last two months, it's not surprising that over three months industrial output is declining in double digits. In fact, looking back over the last 12 months, six months and three months, manufacturing industrial production in Italy falls on all those horizons and its decline gets increasingly large over shorter periods. Over 12 months Italian manufacturing industrial production falls by 2.4%, over six months it falls at an 8.3% annual rate, and over three months it falls at an 11.6% annual rate. Italy’s industrial sector is struggling.

Sectors and sequential weakness Looking at Italian output by sector, consumer goods, capital goods and intermediate goods, there is decelerating output in just about all three sectors. All three sectors showed declines in output over three months, six months and 12 months. The declines are at progressively greater rates of shrinkage in all cases with the exception of capital goods. That exception is only a technical exception as the pace of output decline registers a -7.7% pace over six months; that improves to -7.1% over three months, a small ‘technical’ improvement but still a very large negative rate of decline. Capital goods really aren't an exception to the rule of deceleration and growing weakness across all the sectors when you really look at it broadly.

Quarter -to-date weakness In the quarter-to-date, manufacturing output is declining at a 20% annual rate. For consumer goods, the decline is at a 20.2% annual rate. For capital goods, the decline is at a 13.5% annual rate and for intermediate goods, it's at a 19.7% annual rate. There are double-digit rates of declines overall and for all sectors. That indicates considerable outright weakness on the part of the Italian manufacturing sector. It's no wonder Italy is fighting to try to maintain energy imports during this time that many countries are pushing for an embargo on energy from Russia. The Italian economy relies on Russian energy, and given the state it's in, it's hard to imagine what sort of shape it would be in if Italy’s energy shipments were suddenly cut off.

Italian manufacturing since COVID struck Looking at Italian industrial production and its recovery since COVID struck, all sectors show a lower level of activity than they had in January 2020. Overall manufacturing is 4.2 percentage points lower, the output of consumer goods is 6.6 percentage points lower, the output of capital goods is 3.9 percentage point lower, and the output of intermediate goods is 1.1 percentage points lower.

Percentile rankings of Italian growth rates Evaluating the 12-month growth rates for all sectors, we find the overall standing for Italy is in its 27th percentile. This means that the growth rate has been weaker only about 27% of the time since 2000. The consumer goods sector has a 49.6-percentile standing; that's very close to its median and is the best showing of any of the sectors. The capital goods sector has a 30.7-percentile standing and intermediate goods have a 21.6-percentile standing.

Industrial indicators for Italy are much more upbeat Going beyond the industrial production data, we can look at various indicators for the Italian industrial sector. The EU industrial indicator for Italy, in fact, has a 94.3% outstanding based upon the level of its index value. The statistical agency Istat sees current orders for Italian economy at a 98.9-percentile standing indicating a very high level of orders. The Istat outlook for production is at a 77.6-percentile standing. These surveys of Italian activity are really quite different from what we see when we look at actual industrial production and look at the increases that Italian factories are experiencing on the ground. Clearly, people answering the surveys are somewhat more optimistic when they look at and evaluate the state of conditions or when they form their expectations for the future. It's also true when we look at these indicators that all of the indicator evaluations are made based on levels of the indicators not on their growth rates. But if we were to evaluate the indicators based on year-over-year changes, they would be quite strong as well.

Since COVID struck Compared to their levels in January 2020 since the COVID, all of the indicators have improved. However, if we look at the indicators in the current quarter-to-date, all of them are showing weakness. The EU industrial confidence indicator is down by nearly one point, the Istat current orders index is down by about 3/4 of a point, while the Istat outlook index for production is down by 1.7 points.

Summing up Survey data are much more upbeat in the assessment of the Italian economy when compared to the industrial output. Output shows that, in real time, on-the-ground conditions are poor and they've been bad for quite some time. There's a deceleration in progress and it is deceleration of some significant magnitude. The chart that compares Italian PMI index for manufacturing to industrial production index shows that once again the PMI index for manufacturing is much stronger than the output index and is still above the level of 50 pointing to manufacturing expansion. But in the survey, we see that the PMI is in a declining trend.

Japan's economy watchers index in February tipped slightly lower to 37.7 from January's 37.9; this small backtracking compares to a reading of 57.5 in December. Clearly the economy watchers index in the year 2022 has the economy on much weaker footing than it had been at the end of 2021.

The facts: Over the last three months the economy watchers index is down by 19.1 points; over six months it's up by 2.8 points; over 12 months it's down by four points.

Over the past year the economy watchers index has barely changed and has not been very volatile. It is slightly stronger over six months; it's slightly weaker over 12 months. The queue standing of the index in February is at its 13.4 percentile, a level that marks it as being weaker since 2002 only about 13% of the time. The economy watchers index tells us that Japan's economy continues to struggle as of February.

Current component trends These general points about the economy watchers index permeate the various components which show, for the most part, (1) small changes from January to February and (2) significantly weaker levels in January compared to December plus (3) declines by all components over three months coupled with (4) very small changes over six months, and for the most part, (5) most small declines over 12 months. These generalities are the ‘rule' up and down the line of this survey. The main exception to these rules is that over 12 months there's a more significant weakening for eating & drinking places and that industry depends upon improved conditions on the virus front in order it to be back on its feet.

Current component levels All the queue standing components of the current index are below the 50-percentile level. That's significant because the 50th percentile on the queue standing represents the location of the median for each series. So that each series is performing at a below median level of performance. The best performing of these components on a relative basis is the employment reading which is at its 45.6 percentile standing: the next best after that it's for manufacturing establishments at the 31st percentile standing. The worst performing component, eating & drinking places, had its 4.2% standing followed by services overall at a 9.6% standing. Pretty clearly Japan's economy's struggle is broad-based. Fortunately, employment is the least affected among the components surveyed in the table. The employment reading is below its median, but not by much and its relative strength (compared to other readings) provides stability for the economy because employment supports wages and income creation and thereby spending.

The future index The economy watches future index moved up slightly to 44.4 in February from 42.5 in January; these two readings are somewhat below their December level of 50.3. The future index improved slightly month-to-month and January while the January-February pair are weaker than December by 6-8 points. That is significant, but it is much less that the 20-point drop off for the current index. The future index also shows three month declines across all its components as did they current index. Over six months the future index is mixed but little changed. The future index, like the current index, is moderately lower over 12 months. The percentile standing of the future index is at the 28th percentile overall; across components it ranges from a low of the 20th percentile for nonmanufacturing firms to a high of 34.7 percentile for employment assessments. Like the current index, the relatively strongest reading is for employment in the future index. However, the percentile standing is lower in the future index.