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Economy in Brief

German Real Orders Drop for Fourth Month in a Row Forget Denmark - What’S Rotten in Germany?
by Robert Brusca  June 07, 2018

German new orders fell by 2.5% in April marking their fourth straight monthly drop, a highly unusual development. Domestic orders are down in two of the last three months as are foreign orders. Orders growth rates steadily decelerate from twelve-months to six-months to three-months. And on this timeline both domestic and foreign orders decelerate as well. German orders are uncharacteristically weak. The weakness is severe and it is broad encompassing both domestic and foreign orders. Real domestic sales are weak and on declining as well as decelerating growth rates. The degree of weakness in German real orders and real sales is a surprisingly sweeping phenomenon. And for it emerge as the ECB is prepared remove is last vestiges of stimulus is a cruel irony.

Severe German order weakness: There have only been four occasions of such protracted German order weakness back to 1991. The last one came in September of 2011. Another occasion fell in 2009 when there were six straight months of order declines which translate to three consecutive declines of four months. In July of 1992 there was a string of five straight months order declines which translates into two consecutive four quarter declines.

German real orders are reasonably volatile. Over the past 27 years there have been only ten occasions of German real orders rising for four consecutive months. Contrast that to four episodes of consecutive declines. In terms of actual monthly events there have been 27 months in which orders rose for four months in a row and only 7 months in which orders fell for four months in a row. Four month strings of increases occur 6.5% of the time and four month strings of declines occur 2.2% of the time.

Despite the unusual nature of these events four month strings of order declines are NOT closely associated with the presence of either a current recent or coming recession in Germany.

The pattern that emerges for strings of order declines is that they occur either in recession or after an order surge as a recovery matures and a growth spurt abates. That is what happened in 2011 and in mid-1992. The long 2008-2009 span of declines came in the midst of the nasty long great global recession. And the current string of declines seems to mark another period of a slowdown following a spurt of growth that was well-marked by PMI strength.

This is interesting since the IMF and most monetary authorities especially those in the US and in Europe think there is a speed-up in store. In the US there is a belief that tax cuts are going to cause a surge in GDP while consumption results seem to be telling us just the opposite story.

Of course, if this signal for slowing from a string of declines in German orders is correct, having central banks jumping off the band wagon meant to assist growth could reinforce or exacerbate the slowing that is already in train. Europe is getting ready to pull the plug on its QE program while the Fed has been busily pulling the plug on its balance sheet and draining it steadily as well as marking-up and adhering to a path of rate hikes expected to bring the Fed funds rate up above the inflation rate for the first time in this cycle… as soon as next week.

The question of whether there is a real slowing in train is quite germane. But in the US the Fed has become accustomed to making policy based on is forecasts regardless of how often it has been wrong. The Fed currently is feeling good as inflation is finally looking like it is at its target for the headline rate and looks as though it will soon be there for the core rate as well. If these events come to fruition, the Fed can claim victory for its policy of raising rates while still way below its inflation target. But it can do this only if its rate hikes do not cause new mischief. And that is what the German slowdown signal questions. Is there new mischief afoot?

The slowing global PMI indices from Markit give us reason to believe that the German signal of slowdown has merit. US consumption has slowed and that is particularly evident from slowing in unit vehicle sales that have fallen back below 17mln units in the wake of hurricane replacement buying ending. Spending related to hurricane damage replacement may have fooled some into thinking that the US economy was accelerating. I do not think it is or was. Higher oil prices have diverted part of what was supposed to be an influx of funds to consumers from tax cuts in the US and rejiggered withholding tax tables. That was supposed to send more money to consumer bank accounts instead of to oil companies.

Now, we are on a slowdown watch as the G7 meets. And as key allies bump heads over geopolitical differences, tariff and trade policies and as the US prepares for a historic meeting with North Korea over peace and nuclear disarmament. Europe has its own special demons as it is already embroiled in conflict over the UK decision to leave the EU and as Europe ponders the future intent of Spain with a new socialist government. Italy has a new government that might prove to be separatist. Angela Merkel’s grip on power in Germany is less than it was and she has angered the US over Germany’s ‘choice’ to run a budget surplus instead make its fair payments to NATO as it is obligated. Italy is getting ready to break is budget rules as it has social welfare spending plans that will put it at odds with the EU rules and with the EU Commission. There is a lot in flux that could go right or wrong. That makes this an especially vulnerable period for markets.

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