Economy in Brief: September 2023

Output in the European Monetary Union in July remains a mixed phenomenon. Among the thirteen early reporters of industrial production, six of them show output declines in July, after ten of them had declined in June and five of them declined in May. Over the last three months there has not been a majority of countries showing output declines across all three months but there certainly is a critical mass of countries showing declines and a good deal of unevenness in output in the European Monetary Union. Out of 39 months-to-month changes (13 countries over 3-months), 21 of them showed declines (53.8%). In July among the four largest economies (Germany, Italy, France, and Spain), three of them showed output declines; similarly, 3 of the largest economies posted declines in June; however, in May, all four of the largest monetary union economies logged increases in output.

Sequential patterns: 12-months to 6-months to 3-months Sequential patterns in output are mixed. But looking at the diffusion index for the European Monetary Union overall in manufacturing, the three-month reading is below the six-month reading and the six-month reading is below the 12-month reading. The overarching view from the manufacturing PMI statistics is that there is ongoing weakness in the monetary union. Austria, Germany, Finland, Ireland, and Sweden (the latter not a monetary union member) each show declines in output over three months, six months and 12 months. The median for the monetary union overall shows a 2.1% decline over 12 months; output declines at a sharper 3.6% pace annualized over six months; that decline trims to a decline at a 1.3% annual rate over three months. The lesser decline in output over three months has a lot to do with a sharp 10.7% increase in output from Portugal, a 6.7% increase over three months in Spain, a 5.1% increase in the Netherlands, a 4.8% increase in Italy, and a 3.6% annual rate increase in France. Over three months there clearly is a collection of countries showing considerable strength. However, over three months Germany also shows a 9.5% annual rate decline, Austria logs a 7.9% annual rate decline, and some of the smaller countries post substantial negative numbers for output as well. Sweden, not a European Monetary Union member, logs a decline in output at a 12.6% annual rate over three months. Clearly, the monetary union and Europe are looking at relatively mixed conditions.

Accelerating output trends are weak but improving We also calculate in the table the tendencies for output to accelerate in the euro area on a month-to-month basis; 53.8% of countries show accelerating output in July compared to June. However, in June only 7.7% accelerated relative to May. In May 61.5% of the respondents showed output accelerated relative to April. Over three months 45.5% of the countries are showing output accelerated relative to six-months; over six months only 38.5% are accelerating relative to 12-months and over 12 months only 27.3% are accelerating compared to one year ago. The sequential growth rates on acceleration show that acceleration is a phenomenon that occurs in fewer than 50% of the respondents over each horizon (from 3- to 6-months and from 6- to 12-months). However, the proportion of firms experiencing acceleration has been steadily increasing; over three months at 45.5% the proportion is getting much closer to the neutral mark at 50%.

Quarter-to-date With July data, we have the first monthly observation in the third quarter. Quarter-to-date calculations look at the growth in July compounded over the second quarter average. The median for output in the second quarter in the monetary union is a decline of 3.2%; eight EMU member countries show negative numbers for output in the incipient third quarter with one-month’s data in hand.

IP growth rate rankings Ranking the year-over-year growth rates for industrial production on data back to mid-2006, only two countries in the table have a rank standing above their historic median growth rate over this span. France has a 77-percentile standing, and Malta has a 55-percentile standing. However, among the other large EMU member countries, Germany has a 25.4 percentile standing, Italy has a 32.7 percentile standing, and Spain comes close to having a median standing at the 49.8% mark. The median standing across all EMU members is much weaker at 23.4%.

Japan's economy watchers index slipped to 53.6 in August from 54.4 in July. It's a small slip that still leaves the index with a very high queue standing at its 92nd percentile. The index is lower on balance over three-months, but it's higher over six months and higher by 8.1 points over 12 months. The month-to-month setback seems to be something of minor importance…but momentum is waning.

The future index also slipped back to 51.4 in August from 54.1 in July. That index has a queue standing at its 75.9 percentile, still a firm-to-strong standing but not as strong as the current index. The future index is also weaker over three months and slightly stronger over six months and stronger over 12 months as well, but by just a small amount.

Current index While the current index is lower on the month and it is a minor setback, all components were lower month-to-month except for retailing. There was substantial breadth to the step back in August small though it may be. Many components still have extremely strong rankings. For example, the household sector, retailing, eating & drinking establishments, and services all have queue percentile standings above the 90th percentile. A substantial portion of the economy is still quite strong nonmanufacturers as a group have an 86.6 percentile standing. However, housing has a below-median 39-percentile standing, corporations taken as a whole have a 78-percentile standing, manufacturers have a 64-percentile standing, employment overall has a 55.7 percentile standing not far above its historic median as the median occurs at a rank standing at the 50th percentile.

Future index The future index shows weakness across the board with the headline and all components weaker in August than they were in July. The headline weakens and shows weaker components across the board for three months. Over six months three measures show declines: eating & drinking places, housing, and employment. The rankings in the future survey are generally strong but not as strong as for the current index. The future headline has a 75.9 percentile standing, households, retailing, eating & drinking places, and services all have rankings in their 80th percentile. Housing has the weakest standing at a 37.9 percentile, employment is below its median at a 47.4 percentile standing, corporations is at its 66.4 percentile, manufacturers are at their 60th percentile and nonmanufacturers overall are at their 76th percentile.

Industrial production in Germany fell again in July, although the pace of decline let up from June. Industrial production fell by 0.8% in July following a 1.4% decline in June and a 0.1% decline in May; industrial production has fallen for three months in a row and in four of the last five months. Manufacturing output accelerated its decline, falling by 1.8% in July after falling by 0.9% in June. Manufacturing production had risen by 0.2% in May.

All three major sectors showed declines in output in July with consumer goods output falling by 1%, capital goods output falling by 2.9%, and intermediate goods output falling by 0.7%. This compares to June when only capital goods output fell, dropping by 3.3% while consumer goods output increased by 2.2% and immediate goods output edged ahead by 0.3%.

Sequentially, however, output continues to weaken as the 12-month growth rate is -2.2%, the six-month pace is -5.4% and the 3-month pace is -9.1%. Manufacturing mimics these declines with a 1.5% decline in output over 12 months, a 4.5% annual rate decline over six months, and a 9.5% annual rate decline over three months.

The construction sector drops in July, but it's sequential output path shows the deteriorating trend with construction output rising 0.8% over 12 months, falling at a 1.2% annual rate over six months and accelerating the decline to -3.5% annually over three months. Overall industry, manufacturing, and construction, deliver declining trends and declining trends that accelerate.

Real manufacturing orders and real sales in manufacturing both fell in July. Real sales fell for the second consecutive month-to-month decline; however, both real manufacturing orders and real sales show positive growth and a pickup over three months compared to six months, failing to echo the accelerating downtrend that we see for output overall and for manufacturing and construction in the industrial production report.

Industrial indicators for Germany show greater weakness in July compared to June for the ZEW current index, the IFO manufacturing index, IFO manufacturing expectations, and the EU Commission industrial index. The industrial indicators do not echo the decelerating trend from 12-months to six-months to three-months that we see for industrial output. However, each of these manufacturing measures is weaker over three months than it was over six months, indicating a greater move towards weakness over the last half year or so although not stretching the trend back to 12-months.

There are some early output data available for Portugal and Norway in July. Portugal shows output increase in July while Norway shows a decline. Norway shows industrial output falling in June; however, both Portugal and Norway demonstrate output declines over 12 months and worse declines over six months. But that trend transitions into growth over three months. Portugal shows output growing at a 10.7% annual rate over three months while Norway barely eeks out any gains at all rising at a 0.3% annual rate.