Slippage and Decline Hit German Real Manufacturing Sales and Orders

German manufacturing orders and sales both fell in October. Total orders fell by 3.7% month-to-month after climbing by 0.7% in September. Foreign orders fell by 7.6% in October after rising 5% in September. Domestic orders rose 2.4% month-to-month after falling 5.7% in September. The sector results between foreign and domestic trends, therefore, are not completely in-sync, but they're not completely different either since over two months, both series show net declines.

Recalibrating to look at order-trends sequentially, over 12 months, six months, and three months, declines persist but are not the case for every single one of the sub-periods. • Total orders fall 7.2% over 12 months, then go flat over six months, and then fall again over three months at a 4.9% annual rate. • Foreign orders fall 7.1% over 12 months, but then rebound to rise at a 5.8% pace over three months, and then continue to drop at a 5.4% annual rate pace over three months. • Domestic orders fall 7.3% over 12 months, fall at a faster 8% pace over six months, and then trim their rate of descent to -4.8% annualized over three months. • Domestic orders clearly have the worse profile in comparison with foreign orders; however, neither domestic nor foreign orders show clear ongoing decelerating patterns although they both show patterns revealing persistent declines.

Real sales trends show all manufacturing sales declined by 0.5% in October, by 1.4% in September, and by 0.5% in August. German sales have a clear losing streak. The sequential trends for manufacturing sales show the following: • A 2.2% drop over 12 months, a faster 2.6% pace of decline over six months, and a much faster 9.2% pace of decline over three months. Unlike orders, sales are showing a truly clear decelerating pace. Looking at sectors... • Consumer goods overall show declines in sales over three months, six months, and 12 months and there is a tendency for the pace of decline to worsen over this profile although it's only a tendency not an ironclad rule. • Consumer durables are a subset of total consumer spending. Sales fall 9.3% over 12 months, but then the six-month pace goes to -21% annualized, and the three-month pace is -19.6% annualized; it’s not precisely a deceleration but close enough for me with enough weakness over six and three months and worse weakness that over 12 months to look a lot like deceleration in progress. • Sales of consumer nondurable goods fall by 2.7% over 12 months, make a small gain of 0.6% at an annual rate over six months and then continue declining at an accelerated 5.2% annual rate. • Capital goods sales rise 1.4% over 12 months, worsen to a -0.4% annualized pace over six months, and then worsen further to a -12.2% annual rate over 3 months, a clear deceleration. • Intermediate goods essentially show deterioration as well: sales fall at a 5.8% annual rate over 12 months, show a very slight improvement at -5.3% annualized over six months, and then accelerate the decline to -6% over three months. Clearly, sales show a preponderance of weakness, a preponderance of declines, and a clear tendency for the rate of decline to worsen over shorter periods.

Emerging sales and order trends in the fourth quarter The most up-to-date data are for October, which means we have data through the first month of the fourth-quarter; we can annualize this behavior by looking at the annual rate gain of orders or sales in October compared to the third quarter average. Doing this, we find that orders are falling at a 15.1% annual rate, led by a 21.9% annual rate fall in foreign orders and joined by a 4.8% annual rate decline in domestic orders. Real sector sales show a decline in manufacturing sales at a 9.2% annual rate; consumer durable goods sales fall at a 29.9% annual rate; consumer nondurables sales fall at a 4.1% annual rate; capital goods sales fall at a 7.8% annual rate; intermediate goods sales fall at a 12% annual rate. Both orders and sales fall on a quarter-to-date basis across all these categories and fall at relatively high rates of decline.

The bottom of the table presents readings from the European Commission on industrial confidence for Germany, France, Italy, and Spain, the four largest economies in the European Monetary Union (EMU). • The month-by-month industrial confidence figures for Germany show a slight tendency toward improvement from August to September to October. France also shows a small improvement in train, while Italy and Spain show a tendency toward slippage across this three-month horizon. • Turning to the broader picture of trends over 12 months, to six months, to three months, we find the German trends show clear slippage worsening from a -5.1 survey value over 12 months to a -14.8 survey value over three months; France also worsens on this horizon; Italy steadily worsens on this horizon; so does Spain. • The upshot is that over the last few months, there have been mixed trends, but the broader trend for the year favors the conclusion that there is weakening all around in the European Monetary Union at least based on the four largest economies. The queue or ranked standings for the EU Commission readings in October compare these up-to-date readings to their historic values, revealing consistent readings across these four countries. Germany has a 23-percentile standing, like Italy's 24-percentile standing, while both France and Spain have 34-percentile standings. • The standing data read 100% when the EU Commission indexes are at their highest values and they're at 0% when it's at their lowest values. The median for the EU survey occurs at a rank standing of 50%; all these readings are below the 50th percentile, placing them below their medians significantly below their medians over this timeline.

Summing up trends- The performance of the industrial sector in Germany shows weak and declining orders, significantly weakening and deteriorating trends for industrial sales plus weakness across the largest economies of the European Monetary Union. In the quarter-to-date, orders are falling sharply as are sales both adjusted for inflation. The inflation rate in the EMU has been declining as it has been doing globally in the United States, the United Kingdom, and elsewhere. However, central banks continue to overshoot their inflation targets, but when this happens amid worsening economic performance, the odds that the central bank will fight inflation less aggressively begin to improve as central banks begin to start handicapping the prospect of an economic downturn which always has the effect of depressing prices and lowering inflation- at least to some extent.

The policy cycle- That explains where we are in the policy cycle right now. The ECB has been raising rates. Inflation has stopped accelerating and is decelerating. The economy is weak and shows a good deal of weakness and even, what may be, growing weakness across the monetary union. That's an interpretation that the European Central Bank officials will have to make. They will have to decide whether they think inflation is falling fast enough and the economy is weak enough for them to begin to ease back on the tightening process and let the progress of economic forces that are in train take the inflation rate on a more natural path lower. If they don't think that's the right policy, then they may feel that they still need to raise rates a little bit more to give inflation a bigger downward push and likely to create a potentially sharper or longer economic downturn. These sorts of policy choices are going to be made in the U.K. and the U.S. as well, but these other countries are facing different degrees of progression in terms of the weakness of strength and growth and the trend for inflation and particularly the trend for inflation relative to target.