Economy in Brief: June 2022

German real industrial orders fell by 2.7% in April after falling by 4.2% in March and by 1.3% in February. This is the first series of three declines in a row since January through March of 2020 when COVID struck. Foreign orders have also fallen for three months running: at -4% in April, -5.8% in March and -2.4% in February. Domestic orders have fallen in two of the last three months, at -0.9% in April and -1.6% in March. The weakness in orders is now deep and it's widespread. Having total orders drop for four months in a row, should that occur next month, would be very rare.

Despite the severe weakness over three months, German orders are not decelerating on a sequential basis. However, German orders are falling for total orders, for foreign orders, and for domestic orders over 12 months, six months and three months.

Recent, but severe, order weakness in Germany Orders fail to show sequential deterioration because the decline over six months is smaller than the decline over 12 months for each of the categories of total orders, foreign orders, and domestic orders. Yet, the decline over three months is severe and is far more intense than the decline over 12 months making the sequential decline calculation moot. It's quite clear that orders are deteriorating sharply and that they erode at some speed in each of these three periods (over 12 months, six months, and three months); there is something very much not right with German orders. The three-month change in orders has been weaker only 3.5% of the time since December 2000 for total orders and foreign orders. Domestic orders have been weaker over three months about one-fifth of the time. These statistic record marked weakness.

With such severe declines over three months, it is not surprising that the quarter-to-date comparisons show deeply negative numbers. Even though the data are only one month into the new quarter, new orders are declining at a 30.3% annual rate with foreign orders declining at a 41.4% annual rate and domestic orders declining at a 10.5% annual rate.

With these steep declines on the books, looking at the change in German orders from January 2020 just before COVID struck we see total orders are higher over this better-than two-year period by only 0.7% with foreign orders weaker by 2.1% and domestic orders higher by 4.7%. The concentration of weakness in foreign orders clearly flags the Russia-Ukraine war and the impact of sanctions because of Germany's previous significant trading ties to the Russian state.

Sales by sector Sector sales trends paint a much less gloomy picture with sales rising from manufacturing overall in April by 0.5%; manufacturing & mining sales together rise by 0.6% with total consumer sales rising by a skinny 0.1% led by consumer durables that gained 7.3% in April and capital goods which rose by 1.4% as consumer nondurable goods sales fell by 1.1% and intermediate goods sales fell by 1%.

Over three months, the results are less upbeat. For all manufacturing, sales are falling at a 21.9% annual rate led by a 40.3% (AR) decline in capital goods sales, a 7.1% decline in intermediate goods sales, while consumer sales are up at a 4.4% pace, bolstered by consumer durables which rose at a 14.8% pace. Over 12 months, there are declines in sales for mining & manufacturing, for manufacturing overall, as well as for capital goods and intermediate goods. The overall consumer goods sector shows a gain on an increase in both durable and nondurable goods sales. Even so, sales by sector show broad-based deceleration over three months and they clearly decelerate over 12 months compared to 12-months ago as well. As with orders, there is less of a weakening of sales over six months. On a quarter-to-date, manufacturing sales are down at an 18.9% annual rate. Those declines are led by capital goods that fall at a 32.8% annual rate and intermediate goods where sales fall at a 10.5% annual rate while consumer goods fall at a rate of less than 0.5% annualized.

Pre-COVID comparison Real sector sales compared to their pre-Covid sales levels of January 2020 show declines overall as of April, falling by 6.5%, consumer goods sales are down by 1.3%, capital goods sales are down by 13.2%, and intermediate goods sales are up by only 0.3%. Within consumer goods, there's a split with consumer durables sales up by a solid 7.1% while sales of nondurables fall by 2.9%.

Industrial performance: Germany and Europe We can compare German industrial performance to performance in other European Monetary Union countries France, Italy, and Spain using the EU Commission's industrial indexes also available through April. Those indexes show positive readings for Germany at +16.4 and in Italy at +4.5 in April. France shows a negative reading of -0.5 and Spain records a -1.2. These are net (up minus down) diffusion indexes. In terms of monthly changes, Germany is stronger relative to March by just a tick while the other countries show weakening between March and April with France falling to -0.5 from +1.4, Italy falling just two ticks to +4.5 from +4.7 and Spain falling to -1.2 from +4.4.

The average readings over three months, six months and 12 months show a slow deterioration over those spans in Germany, a slow deterioration in Italy, as well. However, Spain and France present a convoluted pattern that demonstrates neither acceleration or deceleration in a clear fashion. However, if we look at just net changes from a year ago, three of the four largest European Monetary Union countries show increases with Spain alone showing a small decrement over 12 months of 0.2 points.

The queue standings of the industrial indexes from the European Commission show firmness or strength across the board. Germany is at a very high 97th percentile standing, France and Spain boast standings in their low 70th percentile and Italy presents a standing around its 85th percentile. All of these metrics are firm-to-strong. And looking at the industrial data, changes since COVID struck back to January 2020 show positive changes. Spain demonstrates the largest change, up by 34.3 points on this index, Germany is up by 27.0 points, Italy is up by 9.5 points, and France is up by 2.3 points.

PMIs rise but all sectors still contract China's composite PMI rose by five points to 42.2 in May from 37.2 in April. Despite the month-to-month improvement in the index, it still refers to a decline in output in May. The five-point month-to-month rise is significant, but the index at 42.2 is still well below the breakeven value of 50 for the composite index.

Entrenched weakness China in May registers an increase in both the services index and the manufacturing index. The services index improves sharply to 41.4 from 36.2. However, it's moving up from that very week 36.2 reading in April so that even at 41.4 there's a clear-cut decline in services activity being registered. Manufacturing fares better than services; the manufacturing PMI gains by 2.1 points on the month to a diffusion reading of 48.1. That's a lot closer to the breakeven value of 50%, but it still indicates a decline in the sector.

COVID Zero...not a soft drink China continues to suffer from its COVID zero policy and having had substantial lockdowns across the economy. These policies continue and they continue not just to hold the economy down but to threaten its vitality in the future.

Shanghai has reopened after two months of having shutdowns, but it's still at risk to any further infections should they crop up.

Tariff relief? The Biden Administration is considering dropping tariffs on Chinese goods in an effort to combat inflation in the United States. The Administration, reportedly, will still be keeping restrictions on aluminum and steel imports, but it may be willing to drop tariffs on other imported items. That could benefit the U.S. inflation outlook and it could benefit China by making it more competitive in U.S. trade.

OPEC moves but does not groove OPEC-plus has met and is going to increase oil production slightly. However, there has not been a significant impact on oil prices from this move that was largely anticipated. There had earlier been some firmness in oil prices on the ending of China's lockdowns in Shanghai. It also is reported that the Biden Administration without any new deals might be willing to 'look the other way' to let Iran export oil to combat higher global oil prices. There is no hint of the Administration cutting any slack to U.S. oil companies or to the fracking industry.

Significant entrenched weakness in China Beyond the month-to-month changes in China's PMI indexes, there are still broadly declining. China's composite, manufacturing index, and services activity index, all show net the declines over both 12 months and 24 months. The readings for the sectors all are weak. Ranking China's PMI data back to May 2018 shows the manufacturing index has a 6.1 percentile standing, the services sector has a 2.1 percentile standing, and the composite has a 2.1 percentile standing. The composite ranked at 2.1 tells us that it has been weaker only 2.1% of the time since May 2018. Clearly this is a week set of readings for China.

Composite PMI data from S&P Global show broad weakening in May with 10 jurisdictions in the table showing weaker results month-to-month compared to 8 showing improvement. The U.S. and China showed the largest service sector pull backs on an ongoing basis. China does not yet post a composite value, but its composite PMI has been currently caught up in China's zero COVID policy and the ongoing rolling lockouts that have permeated its economy have weighed heavily on economic performance in recent months.

In May, the 18 jurisdictions in the table show an unweighted average of 54.3, down from 54.8 in April but stronger than 53.5 in March. The median, however, fell to 54.2 in May, below April's median of 55.8 and below the March median of 54.6.

The number of jurisdictions reporting composite PMIs below 50 are few and far between for all these periods. In May only three jurisdictions are below 50, in April there are two, and there are no more than two or three for any monthly or sequential interval in the table.

There are, however, more jurisdictions that are slowing. In May 10 jurisdictions show slowing; that's a broader slowdown than in April when four reported slowing, but slightly fewer than March when 12 jurisdictions reported slowing. The sequential comparisons show that five are slowing over three months, 10 are slowing over six months, but only four slow over 12 months compared to 12 months earlier. The data on slowing are mixed although May shows broad deterioration and the median data confirmed that the slowing is ongoing in recent months. The counterpoint is that average data are less supportive of that trend.

Sequential data also give a mixed reading on slowing if we look at the averages and means for their different periods the average PMI shows a slowing from 12-months to six-months and then just a technical upturn over three-months. The median shows a slowing from 12-months to six-months and then a revival over three-months that brings the median almost back to its 12-month value. That is very weak evidence of slowing – but there is no evidence of acceleration.

We can obtain an assessment of performance looking at the queue standings. These are calculations that place the current composite value in its Q of data back to January 2018 expressing the result as a percentile standing. On this basis, over this period the weakest performance is in Ghana, followed by Russia, the U.S., and then Nigeria. The U.S. composite has only a 32-percentile standing, meaning it has been weaker than this May value only about 1/3 of the time over this period. Countries that have top ten percentile standings on this timeline are: Singapore, Brazil, and India. The average queue standing for the period is 61.7%; the median standing is 67.9%. These are moderately firm readings for the average in the median.