Economy in Brief

Japan's economy watchers current index fell to 50.2 in January from a level of 51.8 in December; its queue standing is in its 70.4 percentile, still well above its historic median that occurs at a rank of 50% but more in the range of readings that are indicating relatively firm economic activity.

In contrast, the economy watchers future index rose to 52.5 in January from 50.4 in December. The future index has an 83.8 percentile standing, considerably stronger in ranking than the current index and more clearly at a standing level that indicates more strength.

The Current Index The index showed a decline in the headline as well as declines in six components of the index. The reading for households fell, the reading for the retailing sector fell, the reading for eating and drinking places fell – and fell relatively sharply, the reading for services fell, and the reading for corporations, generally, fell led by a decline in the assessment of nonmanufacturing corporations.

Among the various entries under the current index, the strongest, despite the sharp drop in January, is the 86.6 percentile standing for eating and drinking places, followed by an 80.6 percentile standing for manufacturers. In the case of manufacturers, this likely is the result for Japanese firms benefiting from what has been a chronically weak yen at a time that international activity has begun to strengthen in a number of places. The U.S. economy continues to show stronger growth and the U.S. is Japan's second largest trading partner. However, Japan's largest trading partner is China, and that economy is struggling. The weakest ranking in the current index is for employment; it has a 47.8 percentile standing, leaving it below its historic median; however, the diffusion index still has a reading at 53.3 that improved month-to-month and continues to indicate employment is expanding. While the employment metric is the weakest current reading, housing is in second place at a 59.7 percentile standing.

The Future Index Japan's future index is quite solid with a headline standing at its 83.8 percentile. Three of its components have rankings in their 90th percentile or higher: one is for households at the 90.1 percentile, another is for eating and drinking places at the 98.4 percentile, and a third is for services at the 92.1 percentile. Only one category weakened month-to-month; that was services. It weakened to a diffusion reading of 54.9 in January from 55.2 in December but continues to have a percentile standing in its 90th percentile at 92.1. The weakest future reading is the same as in the current indexes- employment. Employment in the future framework has a 53.8 percentile standing, only modestly above its historic median. The monthly future reading for employment stands at 53.2, up from 52.9 in December.

Momentum Current- The current index shows weaker increases over 12 months than what occurred over 12 months one year ago; that's true up and down the line for components as well as the headline apart from manufacturing that shows a gain. Only retailing shows a decline in diffusion compared with the level of one year ago. Over six months, seven of the categories plus the headline show declines in value. Over three months, five categories plus the headline show declines in their surveyed diffusion indexes. The current index clearly has been losing momentum for a while.

Future- The future index also shows smaller increases over 12 months than it logged over the previous 12 months for all categories except for eating and drinking places, manufacturers, and for employment. Each of those 3 categories show a step up in 12-month changes compared to what they had reported one year ago. Over six months, changes are weaker than they are over 12 months for most components; all components are weaker on balance over six months including the headline except for manufacturers. The manufacturers’ future reading shows persistent acceleration over three months and over six months as well as over 12 months (compared to 12 months ago). The headline reading over three months in the future index shows broad-based increases; these increases are larger than the changes posted over six months for the most part. There is only one exception to that and that's housing; it is weaker on balance over three months.

German industrial output fell in December by 1.6%, extending the episode of continuous month-to-month declines to the last four months and making it part of a period of an eight-month stretch in which there were six month-to-month declines interrupted by two months when output was stagnant. This has been very difficult stretch for German industrial output. The country depends on its industrial sector for economic leadership and growth. Germany has been a significant exporting country. The war in Ukraine has severely disrupted the functioning of the German economy partly because Germany was also doing a good deal of business with Russia before the war began.

Industrial output trends German industrial output is falling sequentially, at a 3.1% annualized drop over 12 months, a 7.7% annualized drop over six months, and a 7.8% annualized drop over three months. Consumer goods and capital goods sectors show declines over each of these three horizons, but they don't show declines that are becoming sequentially worse. And both consumer and capital goods sectors show smaller annual rates of decline over three months than over 12 months. However, intermediate goods reveal a great deal of weakness as output falls by 4.6% over 12 months; that drop steps up to a pace of minus 15.9% over six months then the drop accelerates sharply over three months logging a minus 22.7% annual rate of decline.

Construction The construction sector has also been logging steady declines in output construction shows sequential and worsening declines in output, falling 1.4% over 12 months but dropping at a 25.5% annual rate over three months.

Other economic measures Manufacturing output shows worsening sequential declines, dropping by 3.9% over 12 months and contracting a 9.4% annual rate over three months. Real sales and manufacturing decline in all three horizons and the drop over three months at a 4.7% annual rate is greater than the pace of drop over 12 months which is kind of -3.4% pace; however, the decline in output in Germany is at a slightly slower pace over three months and over six months. Chair wheel manufacturing orders break this pattern of weakness showing a 2.1% increase over 12 months and a 20.4% annual rate of increase over three months, but this was propped up by some unusual aircraft orders the increase reflects a one- off event that isn't likely to be repeated.

Surveys of industrial activity or expected activity Surveys of the German economy from ZEW, the IFO, and the EU Commission show weakening trends. The EU Commission and the ZEW indexes are diffusion indexes that show negative values over all three horizons and values that are gradually worsening. The IFO constructs indexes and these show manufacturing weakening from 12-months to three-months as well as expectations that are weaker over three months than over 12 months, but they managed to improve slightly from what they averaged over six months.

IP snapshot from Other Europe Industrial production elsewhere in Europe is more mixed in December. French and Norwegian output rise while Spanish and Portuguese output falls. Sequentially French output is accelerating along with Portuguese output. Spanish output is decelerating, transitioning from a growth rate of -5.3% over 12 months to -20% at an annual rate over three months Norway fails to show a clear trend, but over three months output is up by 2.7% at an annual rate, better than its 0.9% gain over 12 months.

Quarter-to-date (completed Q4) In the quarter-to-date, all the German industrial production measures show industrial declines. Real manufacturing orders show a minor increase of 0.4% at an annual rate. Three out of four surveys weakened over the quarter, with the IFO manufacturing expectations the exception, which improves slightly. Quarter-to-date output changes for other European reporters show a decline from Spain, against a small 0.2% increase in France, a small 0.8% increase in Norway, and a substantial 12.9% annual rate increase from Portugal.

Historic assessments of performance The column on queue standings compares the various industrial measures to their appropriate measure of performance evaluated in the context of the last 24 years. Industrial production ranks in the lower 14.2% of its queue of growth rates over this period. The strongest industrial sector is capital goods and that has a 23.8 percentile standing, in the lower quartile of its historic queue of growth rates. Economic signals are weak for construction, for manufacturing, and for real sales; real manufacturing orders that have the distortion of one-time aircraft orders have a very strong 95.5 percentile standing. The various industrial surveys have standings that range from a low 5.2 percentile standing for manufacturing by the IFO, to a high 18.1 percentile standing for the EU Commission survey - all of these are quite weak standings. The growth rates of IP for the other four European countries show France above its median with a 55.1 percentile rank; Norway is close to its median of 50 with a 45.9 percentile rank. Spain and Portugal sport rankings in their 14.8- and 21.5-percentile, respectively.