German New Orders and Sales Decline in December

German manufacturing and mining new orders faltered in December after having risen for the three previous months. The index (2000=100) for new orders declined by 1.61% from 118.1 in November to 116.2 in December but was 4.12% above December 2004. Domestic new orders fell 1.24% while foreign new orders fell 2.00% in December from November. The data were somewhat surprising in view of the big improvement in the IFO business climate measure in January, noted last week by Carol Stone. However, the business climate may have been affected more by the outlook than the immediate past. Moreover, the course of new orders has never been smooth as can be seen in the first chart that shows domestic and foreign new orders. While there is evidence of a strong upward trend in foreign new orders and a much weaker upward trend in domestic new orders, these trends have not been smooth. A one month decline has, more often than not, been followed by an increase that has raised the level of new orders above the previous peak.

Sales follow closely on new orders as can be seen in the second chart where sales and new orders are plotted. The correlation of .94 between the two series gives an R² of .88, indicating that new orders account for .88% of the variation in sales.

Just as foreign new orders have outpaced domestic orders foreign sales have been the dynamic area within the manufacturing and mining industries since late 2003 as shown in the third chart. The decline in the euro, starting in December 2004 has been a major factor in last year's rise. Domestic sales, on the other hand, have been hampered by a high level of unemployment and, more recently, by rising energy costs.