German Orders Rise, But There's Really No Surprise

Real industrial orders in Germany rose 0.8% in October, led by a 2.5% rise in foreign orders. Domestic orders fell by 1.9% in October. While unexpected, this gain in orders can't be considered a surprise. The 0.8% order increase comes after a 2.9% fall in September and a 2% fall in August; the 2.5% gain in foreign orders in October follows a 5.2% drop in September and a 1.7% monthly drop in August. Domestic orders had risen by 0.5% in September but also fell by 2.6% month-to-month in August.

Sequential growth rates out the truth As is usually the case, the sequential growth rates tell a clearer story about what is really going on with the trends in orders. One year ago, the year-over-year change in orders was a gain of 0.4%. This year the 12-month gain from that base is a decline of 3.1%, over six months it's a decline at a 6.5% annual rate, and over three months it's a decline at a 15.7% annual rate. Overall orders are decelerating and decelerating steadily on these time horizons. Foreign orders one year ago fell 0.7% over 12 months; this year the 12-month change in foreign orders is a fall of 0.4%, a fall at a 0.2% annual rate of decline over six months- only slightly smaller – and a drop at a 16.4% annual rate over three months. Clearly, another very weak growth rate profile. Domestic orders a year ago rose 2.1% year-over-year but over 12 months domestic orders are falling by 7.1%; over six months they're falling at a 14.9% annual rate; over three months they're falling at a 14.9% annual rate. Domestic orders clearly are weak and are not reviving as the monthly gain might otherwise suggest.

Quarter-to-date (QTD) The quarter-to-date calculations show trends with total orders falling at a 10.9% annual rate, one-month into the fourth quarter with foreign orders falling at a 9.4% annual rate and domestic orders falling at a 13.6% annual rate. These are sharp declines for annualized growth rates adjusted for inflation. Orders have not been strong in Germany for a while. Calculating growth in orders form just before COVID started, in January 2020, total orders are now 2.1% lower from that mark while foreign orders are 2.2% lower and domestic orders are 2.1% lower. These metrics reveal similar weakness across domestic and foreign entities.

Real sales by sector Real sales by sector show better life than orders, but orders are the leading series and sales are the trailing series…. As an overview, total real sector sales are rising at a 2.2% annual rate in the quarter-to-date with manufacturing sales rising at a 2.8% annual rate. Sales are being held back mostly by an 18.1% annual rate decline in consumer durables that has total consumer sales down by 1% at an annual rate in the quarter-to-date. In addition, intermediate goods sales are falling at a 10.8% annual rate QTD. Rising in the quarter-to-date are capital goods sales, up at a 15.3% annual rate and consumer nondurable goods sales rising by 3.1% at an annual rate.

Growth profiles for real sector sales are erratic weakening However, the details on real sector sales show widespread declines over the last two months; sales in six of the seven categories fall month-to-month in October and sales fall in five of seven categories in September. Sequentially real sales data grow by 5.5% over 12 months, accelerate to a 10.7% pace over six months, then decelerate back to a 5.3% annual rate over three months. That is fairly encouraging and stable. Consumer goods sales fall 0.6% year-over-year and fall at a 6.3% annual rate over six months, but then recovered to gain at a 7.1% annual rate over three months, complicating the picture. Still, this is against the weight of consumer durable goods where's sales rise by 1.6% over 12 months, fall at a 7.7% annual rate over six months, and then fall at a faster 8.3% annual rate over three months. Intermediate goods also show sequential deterioration and deceleration with a 1.4% decline over 12 months, a 3.1% decline over six months, and a 6.1% decline over three months. Capital goods show a great deal more strength, up by 15.1% over 12 months and up at a 33.4% annual rate over six months but then cool back to a still very strong 15.9% annual rate over three months. Consumer nondurable goods sales fall by 1% over 12 months and fall at a faster 6% annual rate over six months but then recover at a 10.3% annual rate over three months. The capital goods sector is the only exception and the only source of real strength in sales.

The trends in real sales by sector are a lot more confusing than orders. The quarter-to-date data suggests that the consumer sector and intermediate goods sector are still dragging things down while consumer nondurable goods by themselves are showing moderate growth against capital goods that are growing strongly – for however long that can last in the face of weakness elsewhere.

EMU's 'Big Four' Economies In the bottom panel of the table, the EU industrial confidence measures are presented for Germany, France, Italy, and Spain to compare German trends to the next three largest economies in the European Monetary Union. Germany has a positive reading of plus three in October compared to France at -6.7, Italy at -4.1, and Spain at -4.0. However, looking at the sequential averages of these EU diffusion readings, we see that each of these four countries shows its six-month gauge weakens compared to the 12-month gauge and the three-month gauge weakens compared to the six-month gauge. There is clear weakening going on across the European Monetary Union's largest economies. However, the queue standings that evaluate the levels of the October readings compared to recent history (in this case taken back to 1990) shows more strength than you might expect. The German reading has a 78-percentile standing which is quite firm. Spain has a reading at its 54.5 percentile which is above its historic median. France, at its 48.9 percentile standing, is only slightly below its historic median. Italy at 42.4 percentile standing is below its historic median and weak but far from collapsing.

Growth since COVID after the bust/boom cycle has been weak Evaluated from their level in January 2020 before COVID struck, the German industrial confidence measure is the relative strongest in this group, having risen 13.6 points from that mark; Spain has risen by 5.4 points, Italy has risen by 0.9 points, France has a net lower reading, falling by 3.8 points from its level on January 2020.

Summing up Only the headline in this report flirts with good news. The details, the sequential patterns, the quarter-to-date readings, and even the recent data on real sector sales trends, all show that trouble continues to brew in Germany and across the European monetary union's largest economies. The data of this month offer a message that is clear cut.

We know the background trends remain weak globally with the only good news being that there have been some signs of stronger growth in the United States while the Federal Reserve is making noises like it is going to slow down its pace of tightening. Also, from China there is good news, where China is stepping away from its zero COVID policy and that has ignited rallies in the Chinese stock market and has been cause for some optimism despite some clear impediments to growth that are going to remain as China tries to sweep away its legacy of zero COVID and its related restrictions. China has even admitted that COVID is less dangerous than it was, and it has acknowledged that this move to step away from its zero COVID policy is a reaction to protests, which Prime Minister Xi has chalked up to disappointment and the lack of patience on the part of Chinese youth. This seems to be a way for him to acknowledge that he is listening and responding; yet, he's not giving in to any political pressure because he is trying to link the disappointment to the age-old issue of reactions from an impetuous youth. Time will tell how that will play out. Xi has already made it clear that his objective for the next five years is 'security' not growth. How will that go down once the onerous COVID policy is lifted, and growth still refuses to fully revive?