Economy in Brief

The chart shows that European Monetary Union industrial production in manufacturing has been declining across sectors on a year-over-year basis for quite some time. Intermediate goods output declines extended back to April 2022; for consumer goods the declines occurred early in 2023 and have persisted; for capital goods the declines occurred around July 2023 and with one spike reversal the declines have come back vigorously. Capital goods output is currently showing the deepest year-on-year decline in output of any manufacturing sector. The annual trends are clear and quite negative. However, the short-term trends are different, much more optimistic.

Sequential growth rates in IP From 12-months to six-months to three-months, EMU output excluding construction shows a turnaround in progress. Output falls 7.1% over 12 months, falls at a 2.8% annual rate over six months, and falls at just a 2.4% annual rate over three months as trends make steady improvement. Sequentially from 12-month industrial production is showing signs of diminished declines. This trend holds for manufacturing as well where output declines at 7.5% over 12 months, while over three months and six months the pace of decline is reduced to under 1%. We see improvement in two of three sectors as well. Consumer goods output echoes this improvement with year-over-year decline in output at 6.3%, a six-month decline at a 4.2% annual rate, and a three-month decline at a 2.3% annual rate. Intermediate goods show output is gaining momentum culminating in an output increase over three months. Twelve-month intermediate goods output falls by 2.9%, then rises at a 0.4% pace over six months, and then increases at an annual rate of 6.3% over three months. The fly in the ointment for short-term trends in manufacturing is capital goods. Capital goods output declines at a 9.7% annual rate over 12 months; over six months it continues to decline at a rapid pace although slightly diminished, falling at a 9.1% annual decline rate, and then over three months, the rate of decline accelerates sharply to -17%. These trends create a confusing picture for output where there continues to be long-term weakness punctuated by short-term improvement in consumer and intermediate goods but held back by ongoing and severe weakness in capital goods output.

On a quarter-to-date basis (QTD), weakness dominates the overall statistics with a 6.8% annual rate decline in eurozone output excluding construction. Manufacturing is even more severely crimped with a decline at an 11.5% annual rate. The manufacturing result is driven by a 34.7% annual rate decline in the output of capital goods even though intermediate goods output increases at a 7.3% annual rate and consumer goods output falls at only a 0.5% annual rate. In the quarter-to-date, manufacturing trends are weak but also are represented by considerable variety.

Country patterns in manufacturing Across 13 of the earliest members of the European Monetary Union in February, we see manufacturing declines in only three: Belgium, Spain, and Greece. In January, eight countries show declines in output. In December, only four showed declines; those included Germany, Finland, Spain, and Portugal. Quarterly trends across countries show some signs of progress. Ten countries showed declines in industrial production over 12 months; that count was reduced to nine countries over six months and reduced further to five countries over three months. The median result across these countries is for a decline in output of 2.4% over 12 months, a decline of 2% output at an annual rate over six months and an increase in output at a 1.6% annual rate over three months. The country level data support a more optimistic reading of trends. Even so, the quarter-to-date comparisons eight of these thirteen countries with output declining in the first quarter.

Japanese economic data have been soft. However, industrial production has been weaker than many of the other reports, and weaker than the softness indicated by the manufacturing PMI. This month the preliminary report on Japanese industrial production has been revised to show even more weakness. Japan's industrial sector shows an extremely weak progression looking at its pattern of growth over 12 months to six-months to three-months. The downturn in manufacturing is intensifying.

The weakness in manufacturing is generally weaker than what we see in other reports as well. While there's been softness in surveys like the economy watchers report, and in Japanese retail sales, the industrial sector is showing sharply weaker conditions, and this is occurring even at a time when the yen exchange rate is weakening and improving Japan's competitiveness.

The weakness in industrial production does track the weakness in Japan’s core orders that have been showing contraction for all of 2023 and into 2024. Japan’s production was down by 1.6% over the previous 12 months; now it is falling by 6.7% over the most recent 12 months. Sequential growth rates tell us that the drop in production is accelerating across major manufacturing categories. This weakness is not an isolated result.

The European Central Bank met today and held its policies steady. Markets are looking ahead to the June meeting where they expect there will be a rate reduction. If you read the statements from the ECB, you may have had a strange sense of Deja vu because you're getting basically the same communication out of the ECB that we've seen from the U.S. Federal Reserve. The ECB continues to say that it has interest rates in a high enough position to deal with their current inflation risks and this is the exact same approach that's been taken by the Federal Reserve – even as inflation has been rising. In the Federal Reserve minutes released yesterday, in fact, the Fed went on to say how its policy is well positioned to deal with any risks in the economy. It points out that it's prepared to leave interest rates in this restrictive area for longer or it's prepared to cut rates if that's what it takes. However, the Fed stops there; it makes no direct mention that it's also prepared to raise rates if that's what's required.

U.S. vs. EMU comparison- Inflation in the European Monetary Union appears to be more contained than inflation in the U.S., where it has recently kicked up its heels as EMU inflation has slid lower. In the U.S., core services inflation rises at a 6.8% annual rate over three months and at a pace of over 5% over 12 months. The core services measure in the U.S. is 70% of the core measure so it's hard to ignore. But, so far, Fed communications have managed to do just that. For now, the communications we're getting from the Federal Reserve and from the ECB seem to be highly similar although I question whether the monetary developments and the inflation risks in the two areas are anything like the same.

EMU conditions Nominal money and credit- Over 12 months money supply in the monetary union is falling by 0.7% on the M2 measure. Credit to residents is falling at a 0.1% pace and private credit is unchanged. Comparing the growth metrics for money and credit to their growth rates over two and three years, both money and credit are showing a slowing pace. Flipping the comparison forward to look at the 12-month growth rate against the six-month and three-month growth rates, reveals a slight difference. On this forward-looking path, M2 is starting to accelerate in the monetary union while the credit measures are still flat or weakening.

Real money and credit- If we reassess these measures for inflation, the growth rate of real money in EMU is down 3.2% over the last year, with credit to residents down by 2.6% and private credit down by 2.6%. These are the same or slower rates of reduction that the monetary union reports over two years and three years. Comparing the year-over-year results to the annual rates over six months and three months, we see less real deterioration in terms of money supply, we see, at least over three months, greater deterioration in the use of real credit in terms of either credit to residents or private credit. Real credit use in the EMU is not being stimulated.

Monetary policy ahead: U.S. and U.K.- The U.S. and the U.K. report declines in their respective money supply measures over 12 months. These declines represent increased weakening compared to the path over two and three years. However, flipping the comparison forward in the shorter time horizons, we see the money growth in both the U.S. and the U.K. starting to pick up. The U.K. has positive money growth of 1.4% at an annual rate over three months. The U.S. has positive a growth of 1.8% at an annual rate over three months. Expressed in real terms, the U.S. and the U.K. show less monetary contraction over 12 months than over two years and they show a declining rate of contraction over six months and three months compared to 12-months. On all these measures, we're seeing money supply move to either a less contractive phase or to a more expansive phase in terms of the nominal numbers.

Japan- Of course, the country that's different than all of these is Japan. Japan logs positive growth rates and actually fairly steady growth rates. If we look at annual rates spanning three years to three months, the growth rates on those various horizons vary only from 2.3% to 2.9%. That is quite a bit of monetary growth stability. In Japan, money growth expressed in real terms is down by 0.3% over 12 months which is slightly less contraction than it logged over the last two years; however, over a six-month and three-month horizon, real monetary growth picks up to 0.2% over six months and finally to a 2.4% annual rate over three months.

Global trends After logging a huge boom in money supply growth during the pandemic period, money supply has contracted in money center countries, except for Japan, although all countries have showed some degree of contraction when money growth is measured in real terms. Since then, there has been a turn around with more stimulus creeping into the picture. In the European Monetary Union, the use of credit continues to lag behind the stimulus from money growth and economic growth continues to be weak.