Economy in Brief: August 2023

Japan's economy watchers index moved up to 54.4 in July from 53.6 in June. Six of nine of the component readings improved month-to-month. The sector readings did not improve on the month for eating and drinking places, for services, or for housing.

The future index also improved month-to-month, rising to 54.1 in July from 52.8 in June. Only one component reading in the future index backed off month-to-month; that was for manufacturers.

Over 12 months and over six months, all the point-to-point changes are positive in the current index; however, over three months we see a decline in the headline as well as in five of the components. Over 3 months, there's weakening in households, eating and drinking establishments, services, nonmanufacturers, and in employment overall.

The future index shows similar results. Over 6 months and 12 months, the headline for future readings and components all improved. However, over 3 months the future reading is lower and five of its individual readings are lower as well. The 3-month change in the future readings is lower for households, retailing, services, manufacturers and employment.

However, the economy watchers indexes have come a long way. The survey is a diffusion index so that it's queue standings have substantial meaning. The current index has a 94.1 percentile standing on data back to 2002 and the future index has a 92.5 percentile standing; both of these readings are quite high even though they derive from diffusion values with readings of only 54.

In the current index, the strongest readings are for households, in the services sector, for retailing, for eating and drinking places, and among corporations for nonmanufacturers. The weakest queue standings are in housing, for employment, and for manufacturers.

The future index shows its strongest readings with 90th percentile standings or higher: eating and drinking places, retailing, services, households, nonmanufacturers and corporations overall. The weak readings in the future index are housing, employment and manufacturers. The weakness is in the same sectors as those that lag the most in the current index.

Despite a previously issued strong orders report (a report that is summarized in the table below), German industrial output backtracked in June, falling by 1.5% month-to-month after falling by 0.1% in May. More broadly, the sequential growth rates show German industrial output lower by 1.8% over 12 months, rising at a 1.7% annual rate over 6 months and then falling at a 5.2% annual rate over 3 months.

In the current month, sector activity in Germany is mixed with consumer goods output rising 1.8%, capital goods output falling 3.9%, and intermediate goods output rising by 0.4%. This pattern of increases and declines is completely the reverse of what each industry reported in May.

Looking at industries over a broader sequential framework, consumer output accelerates from -0.8% over 12 months, to a smaller 0.2% negative growth rate over 6 months, to a solid 7.6% annual rate of increase over 3 months. Capital goods, however, head any other direction. Capital goods output rises by 4.3% over 12 months, declines at a 2.5% annual rate over 6 months, and then declines faster, at a 5.6% annual rate over 3 months. Intermediate goods show a chaotic pattern with output falling 5.4% over 12 months, log a strong 8.2% annual rate gain over 6 months, and then fall at a 2.9% annual rate over 3 months.

The construction sector also shows a chaotic pattern. Construction output fell by 2.7% in June after increasing in May and April. Construction output is down by 1% over 12 months, rises at nearly a 17% annual rate over 6 months, and then collapses to fall at a 3.2% annual rate over 3 months. There is no pattern there.

Manufacturing alone shows a 1.2% drop in output in June after smaller increases in both May and April. Manufacturing output has a chaotic pattern with a 0.4% fall over 12 months, a 1.5% annual rate of increase over 6 months and a 2.5% annual rate of decline over 3 months. The orders figures for manufacturing are strong as we reported earlier with explosive growth rates culminating in a 68.1% annual rate over 3 months. Big-ticket orders in the aircraft sector are responsible for most of that strength. In contrast to the strong orders, real sales in manufacturing fell in June by 1.6% after rising in May and falling in April. Their pattern shows a steady menu of increases, but the 0.4% rise over 12 months eases to zero over 6 months and then accelerates to 6.1% over 3 months. That's a small deviation from what would otherwise be an accelerating pattern.

Other manufacturing gauges for Germany show the ZEW current index weakening sharply in June and weakening from April to May to June while that same index shows improvement from 12 months to six months to three months. The IFO manufacturing gauge shows a steady slippage from April to May to June, but from 12-months to 6-months to-3-months the IFO is firm. IFO’s manufacturing expectations survey slipped decidedly from 96.6 in April, to 90.7 in May, to 84.1 in June. However, the progression from 12-months to 6-months to 3-months shows a step up from 12 months to 6-months and then a small step back from 6-months to 3-months. The EU Commission industrial gauge also shows monthly slippage April, to May, to June, and it shows a confirming slippage from 12-months to 6-months to 3-months. Germany's industrial indicators show us some mixed patterns with a good deal of weakness trending over the last 3 months but with more substantial firmness generally from 12-months to 6-months to 3-months.

Manufacturing in select other European countries shows widespread weakness with declines in output from France, Spain, and Portugal in June, while Norway posted a flat performance. All these countries showed increases in May and three of the four had declines in April. Rates from 12-months to six-months to three-months show a chaotic pattern in France as well as in Spain. There are persistent declines in Portugal that border on deceleration. Norway shows positive growth rates on all horizons; there is only a modest tendency toward strengthening.

German orders surged in June rising by 7% after gaining 6.2% in May and after rising 0.2% in April. This is a particularly strong stretch for German orders. Orders are being pushed ahead by the foreign sector as foreign orders grew 13.5% month-to-month in June after rising 6.8% in May. Domestic orders fell by 2% in June after rising 5.3% in May.

Sequential trends Sequentially, German orders are accelerating, growing by 2.9% over 12 months, rising at a 13.6% annual rate over 6 months then exploding at a 68.1% annual rate over 3 months. This profile is engaged to some extent by both foreign and domestic orders, but it clearly is being driven by foreign orders. Foreign orders rise 8.6% year-over-year, advance at a 30.8% annual rate over 6 months, and then skyrocket at 108.8% annual rate over 3 months. In contrast, domestic orders over 12 months fall by 5%, and then they weaken further, falling at a 7.8% pace over 6 months; however, over the most recent 3 months domestic orders turn around and grow sharply at a 21.7% annual rate.

An unexpected -and probably not lasting- surge in orders The strength in orders Germany experienced in June has come from large orders substantially related to the aerospace industry mostly concentrated from fellow members within the European Monetary Union, augmented by moderate strength from outside the Monetary Union as well. The surge in German orders saw large new product orders rise sharply in June; excluding this surge, new orders fell by 2.6% month-to-month. Orders from other European Monetary Union members grew sharply in June, rising 27.2% on strong demand from the aerospace industry. Foreign orders from outside of the euro area were solid, rising 5% month-to-month. In contrast, German domestic orders languished, and fell on the month.

Just-completed Q2 Despite this strength, in the quarter-to-date (just completed Q2), orders are rising only 0.9% at an annual rate with foreign orders falling at a 0.4% annual rate and domestic orders rising at a 3% annual rate.

Real sales are pedestrian Real sales across sectors exhibit declines everywhere in June. The sector weakness is surprising in view of the strength in orders. For manufacturing, the sequence of growth rates shows a 0.4% gain in real sales over 12 months, flat performance over 6 months, and a 6.1% gain over 3 months. Over 3 months, mining & manufacturing real sales are up by 6.6% at an annual rate; consumer sales fall by 2.4%, with consumer durable sales extremely weak. Capital goods sales rise strongly at a 22.1% annual rate over 3 months, but intermediate goods sales fall at a 6.7% annual rate over 3 months. In the quarter-to-date, real manufacturing sales are rising at a 1.9% annual rate.

Industrial confidence in EMU’s largest economies EU industrial confidence shows worsening. The confidence for Germany, Italy, and Spain, three of the four largest economies in the European Monetary Union, declined in June. France registers a -7.8 reading for industrial confidence in June, an improvement from its -9.2 reading in May, but clearly not enough to create an overall positive signal for France, Italy, and Spain taken together. Over the last 12 months, all four countries show weaker readings in June than they display over 12 months on average. Looking at point-to-point changes over 12 months, the German economy has fared the worst backtracking by 23.8 points over 12 months, compared to Spain losing 10.5 points, Italy losing 9.2 points and France shedding 7.7 points. These confidence measures when ranked on data since 1990 show lower 33- to 42-percentile rankings for all these countries. All the Big Four economies in the EMU have confidence readings below their respective medians- all are weak.