Economy in Brief: September 2022

German industrial output fell by 0.3% in July after gaining 0.8% in June and falling by 0.1% in May. These figures, of course, do not reflect the freshest news in Europe concerning the shutting of the gas pipeline from Russia. Germany is beginning to take some steps as it has agreed to keep open two of three nuclear power plants that had been scheduled to be mothballed. Still, it's keeping open only two of three not three of three and it appears that Germany is still not willing to pull out all the stops to find alternatives to the gas that they're losing from Russia even though more nuclear power would mean that Germany could burn less gas to generate electricity and make up for some of the loss from the Russian pipeline. Green still has power in Germany. When winter comes, the new motto could be ‘let them burn furniture.’ That happened a year ago in the U.S. when Texas had a pronounced and severe cold snap and the electric grid failed. Reality lurks and action shirks. Germany needs to think right now about what winter is going to be like if the pipeline stays shut- it needs to act now.

Monthly results Energy is going to be a concern for the future; what's unfortunate is that as of July Germany logs a decline in industrial output, led by a 2.4% decline in consumer goods output, a 0.8% decline in capital goods output, and a 0.6% decline in intermediate goods output. All this is ahead of any energy shortage. Construction sector output also fell by 1.3% in July. Manufacturing output fell by 1.0% in July. What’s next when energy is in short supply?

German output trends German output trends are not quite as bleak, but they're not very encouraging either. Growth rates from 12-months to six-months to three-months show industrial output falls by 1.1% over 12 months, it falls at a 4.2% annual rate over six months, then it gains at a 1.6% pace over three months. Three-month output declines for consumer goods and intermediate goods, but those declines are dominated by a sharp rebound in capital goods output. Manufacturing output declines 1.4% over 12 months and drops at a 4.2% pace over six months; however, it expands at a 3.4% annual rate of increase over three months.

German orders point to weakness Manufacturing orders, which are highly correlated with manufacturing output, show a 13.7% decline in real orders over 12 months, at 17.8% annual rate decline over six months and a slower, 6.2% annual rate decline over three months. The pace of decline does diminish over three months, but it's still a significant pace of decline. Meanwhile, the monthly data show increasingly large declines in orders from May to June to July.

Sales trends Real sales in manufacturing show a convoluted pattern with a 1.1% gain over 12 months, a 4.1% annual rate drop over six months, and a sharp 17.3% rate of increase over three months. The three-month increase is based on a 2.5% increase in May, a 3.4% increase in June, but then tempered by a 1.8% drop in July.

Industrial indicators German industrial indicators are not encouraging. The ZEW current index weakens from 12-months to six-months, to three-months. The IFO manufacturing index, the IFO manufacturing expectations index, and the EU Commission industrial index all follow suit. The monthly patterns are equivocal, but they generally show declining activity month-to-month from May to June to July.

Other Europe Other European countries have issued early industrial output reports: they show mix patterns. Portugal shows declines in each of the last three months compared to Sweden where there are increases and accelerating increases across the last three months. Norway shows accelerating activity over each of the most recent three months as output moves from a 2.2% decline in May, to a 0.2% increase in June, to a 1.4% rise in July. However, the sequential performance of these countries across broader spans is mixed and less encouraging. From 12-months to six-months to three-months, Norway shows sequential deterioration. Sweden shows sequential acceleration- and some real strength. Portugal shows a mixed pattern ending in weakness over three months. Only Sweden shows an increase in output over three months, while Portugal and Norway report declines in output over three months.

QTD: Quarter-to-Date July marks the start of data in a new quarter; the early read shows an increase in output at 1.2% annual rate in the third quarter over the second quarter base for Germany. Sweden and Norway show significant increases over their second quarter output bases while Portugal shows a sharp decline. German indicators, early in the third quarter, also report declines compared to their second quarter values. The German construction sector shows a decline QTD as well. All manufacturing orders show a decline QTD; manufacturing output rises at a skinny 0.2% annual rate. Real sales in manufacturing are up at a robust 7.5% annual rate- a marked contrast.

Among the 25 entries in the table for composite PMI values in August, only 6 show month-to-month increases in August. Those showing improvement are Italy, Sweden, India, Saudi Arabia, the UAE, and Egypt. Three of them are countries in the Middle East, India was another, Sweden, a northern European economy, and Italy, a Mediterranean European Monetary Union member, was the final member of this group. There's nothing special that stitches them together apart from the three Middle Eastern countries that are geographically concentrated and that benefit from the ongoing high oil prices in the world economy.

In July only seven countries had improved month-to-month and in June on the eight countries had improved month-to-month; for the most part these were different groups of countries although Russia improved in July and June, Saudi Arabia improved in August and June, Ghana improved in July and June, Egypt improved in August and July, all of the rest of the cases were isolated.

Similarly, over three months only nine countries have improved compared to six-months; none of them were among the group of the largest economies in the table. Over six months nine countries improved compared to 12-months and year-over-year 11 countries improved compared to the 12-month period earlier; that count still falling short of representing half of the group.

The percentile standings show that a large proportion of the August values still reside in the upper portion of the full range of values these countries have had in their PMI composites from January 2018 to date. However, if we look at the queue percentile standings that place the August value in a particular spot in its historic queue based upon the number of observations above and below it, rather than based upon the maximum and minimum values in the range, we get a very different result. That result reveals the month's readings to be quite a bit weaker than range standings suggest. Fully 16 of the 25 values in the table reside below their historic medians which means on a queue percentile basis they have rankings below their 50th percentile. Most of them, in fact, are far below their 50th percentile indicating extremely weak standings. Nine of the 25 members have percentile standings in the lower one-fifth up their historic queue of data. That means that they have been stronger than their August values 80% of the time or more. Only two countries have percentile standings in the top 10% of their queues: those are India and Saudi Arabia.

The composite – service sector plus manufacturing sector- PMI paints a picture of the global economy that is weakening and paints a picture of a global economy that is already weak. At the bottom of the table, average and median data for benchmark countries and aggregates provide more perspective. The unweighted average for the U.S., the U.K., the European Monetary Union, and Japan has a PMI value of 48.2 in August and 49.8 in July; both indicate that those countries on an unweighted average basis are showing contracting economies based on the averaged composite PMIs.

These are composite PMIs not just the manufacturing sector; they include the broad services sector and therefore they're broad gauge of these economies. PMI data can differ from ordinary economic data which I referred to as accounting data since GDP and traditional statistics tend to count the data rather than to deal with the sorts of breath statistics that PMI data are based on. However, the two data presentations do tend to give us many of the same signals and the PMI data based on breath are well known to be sensitive to changes in economic conditions; they can serve the role of a canary and a coal mine to warn us when something is starting to go wrong.

The unweighted average for the U.S., U.K., EMU and Japan readings progressed from 53.4 over 12 months to 52.6 over six months to 50.2 over three months that's a clear weakening. For the Bric excluding Russia, the pattern is different: 52.3 for the 12-month average, slipping to 52.2 for the six-month average, but then rising to 54.7 over three months. The average for the full 25-member group slips to 53.0 over six months from 53.6 over 12 months and again to 52.3 over three months. The median for the full set of countries also shows slippage from 53.8 over 12 months to 53.0 over six months and to 51.8 over three months. Both the median and the average measures for the full data set show slippage.

However, when it comes to contraction, August shows only 10 of 25 jurisdictions below 50 compared to 7 in July and 4 in June. Over three months only six averages show below 50 values compared to five over six months and 5 over 12 months. This is a starkly different comparison from slowing. Statistics on slowing show 19 jurisdictions slowing in August compared to 17 in July and 17 slowing in June compared to May. Over three months 16 jurisdictions slow compared to six-months, and in six-months 16 slow compared to their 12-month values. Over 12-months, however, only three jurisdictions slow compared to 12-months earlier. Slowing is extremely widespread; but contraction is still not very widespread, occurring in its most frequent month of August in only 10 of 25 of these reporting jurisdictions – still that's 40%.

Haver Analytics is launching today its inaugural ‘Charts of the Week' publication. Every Friday we will publish six charts accompanied by a brief overview and some commentary that showcase our databases (including new data additions) and our analytics. Most of these charts will drill into the latest global economic dataflow and highlight some of their more noteworthy trends and implications. But we will aim to flag other topical data points too from our non-macro offering including, for instance, from our ESG database.

A common theme from our charts this week is the downside risks that have been accumulating for the world economy in the last few weeks. Forward-looking survey data have fallen, or are closer, to levels that have previously been associated with recessions. Most major central banks, in the meantime, have either continued to lift interest rates and/or communicated – with greater zeal - their intentions to do so not least because labor market activity is still quite strong. Emerging market economies in the meantime have remained under pressure, in part because of a strong US dollar, but also because of ongoing weakness in China. Finally geopolitical tensions have remained intense in Eastern Europe, which is magnifying supply-side bottlenecks, not least in the energy sector, and further disrupting economic activity on the broader European continent.

Global growth Last week's flash PMI data for the US, Euro Area and Japan suggested that aggregate output contracted in August and to a degree that - excluding the first wave of pandemic lockdowns - was the steepest since the global financial crisis in 2009. A similar message emerged from this week's final manufacturing PMI for China.