Economy in Brief

Manufacturing output in the European Monetary Union (EMU) continues to show countries struggling to make sustained gains. In the table, EMU members are early reporters of IP data. Manufacturing statistics in August show five of those thirteen countries have declining output. In July, six of them showed declines; in June, five showed declines. Slightly more than half of the reporters do show increases on a month-to-month basis. But the margin between the number with output increasing and decreasing is not impressive. The median increase among these members in August shows IP up by 0.2%, in July the median increase was 0.4%, the same as in June. Despite the mixed nature of these statistics, the median on balance shows consistent monthly increases in output in June, July, and August. However, over these same months, the proportion of reporters showing output accelerating is generally disappointing. In June about 54% of the reporters show output accelerating, in July that fell back to 38.5%, in August that proportion improved only slightly to 41.7%. In each of the last two months, fewer than half of the reporters were showing an acceleration in output.

Sequential data details Sequential data that look at these same countries’ annualized output growth over 12 months, six months and three months show more seriously mixed and weak economic conditions. Over three months, seven of the thirteen reporters show declines in output. Over six months, eight reporters show a decline in output, and over 12 months, seven of the reporters show a decline in output. Once again, the split between the number of countries reporting output increases and decreases is only a narrow margin, but on these horizons, there are slightly more countries reporting declines than increases.

Sequential trends Not surprisingly, the sequential data show median output changes with declines. Over 12 months, the median decline rate is -0.7%, over six months it's almost the same, at -0.6%, but over three months the output decline worsens to -4.1%. These are all based on data surveyed at an annual rate. If we look at the underlying trend for output over 12 months, 75% of the reporters show output accelerating, but over six months only 33.3% show output accelerating, and over three months only 45.5% show output accelerating.

The bottom line for manufacturing output in the EMU is that monthly conditions are mixed, and the broader sequential data are showing more weakness and more of a tendency to weakness.

Quarter-to-date The quarter-to-date shows seven monetary union economies with output declining; this is two-months into the third quarter. There is some strength, but the strongest reporter is Ireland where output data are notoriously volatile; still in the quarter-to-date, Irish output is up at a 50% annual rate; output in Finland shows a 14% annual rate increase; Belgium shows about a 13% annual rate increase. Those are encouraging numbers; however, on the negative side, there are double-digit growth rates posted by Luxembourg, Malta, Greece, and Portugal. For the most part, these are small or middle-sized European economies, but Europe's largest economy, Germany also shows a quarter-to-date decline in output at a 7% annual rate, with Italy, the 3rd largest economy, showing a 6.7% decline in output at an annual rate. Spain in the EMU’s 4th largest economy; it shows output declining at a 7.5% annual rate. Among the big four European economies, only France with output up at a 1.6% annual rate has an increase in the quarter-to-date.

IP growth is undernourished Growth rates for industrial production are generally below par with the average growth rate; on data back to 2006 at the average percentile rank standing for output growth across these countries is 39.5%. That compares to a median ranking at a 42-percentile standing. Both these calculations show that the average or median growth rate for these 13 countries is weak. The representative growth rate for this group is below the countries’ respective medians for the period. In August, only Belgium, Malta, Ireland, and Greece have percentile standings for their growth rates year-over-year that are in excess of the ranking of 50% putting them above their historic medians. By comparison, the BIG-4 economies in the monetary union show growth rates that rank much weaker in their historic profiles. Listed by the relative size of their economies, Germany has a growth rate with a 20.5 percentile standing, France has a growth rate with a 43.3 percentile standing, Italy has a growth rate with a 15.6 percentile standing and Spain has a growth rate with a 25.4 percentile standing. The BIG-4 economies are relatively much weaker than the rest of the monetary union.

Momentum In terms of momentum, the large economies are split with Germany showing an acceleration in output culminating in a growth rate of 7.9% at an annual rate over three months. France shows the same tendency with weak growth rates over six months and 12 months progressing to a 10.4% annual rate of growth over three months. Italy, however, shows slippage with growth rates that are negative on all horizons and with the largest negative growth rate at -7.7% over three months. Spain also shows a progression towards weakness. Spain's progression is severe with output falling 3.7% over 12 months, falling at a 19.4% annual rate over six months and plunging at a 27.1% annual rate over three months.

Conditions in the monetary union remain mixed with a clear tilt toward weakness and with countries generally showing manufacturing sectors that are producing weaker than average results compared to historic performance.

Japan's economy watchers index took a step back in September after rising in August. The step back takes the September level down to just a few ticks above its value in July. The future index for the economy watchers survey also edged lower, although not as definitively as the current index; it fell to 49.7 in September from 50.3 in August, still above its July value by more than a point. Ranked on data back to 2002, the current economy watchers index has a queue standing in its 53rd percentile, putting it just slightly above its median for that period. The median on ranked data occurs at a ranking of 50%. The future index is slightly stronger with a ranking on the same timeline at about its 59th percentile.

Performance overview Both the current and the future indexes show widespread declines in diffusion values in September compared to August. In the current index, only the rating for eating and drinking establishments shows improvement in September; for the future index there are increases in the services index and in the reading for overall employment. Both the current and the future indexes are below the 50 threshold, which on the diffusion index implies a decline in activity. Looking at components, the current index has only one value - that for eating and drinking establishments - above 50 and has a reading for nonmanufacturing establishments exactly at 50. For the future index, the services reading has a diffusion value above 50 along with employment index and eating and drinking establishments; the reading for manufacturers is at 50.1, barely above 50.

Changes in index values; momentum Looking at changes in the current and future indexes over three months, six months and 12 months, both surveys show improvements over three months preceded by net declines over six months and over 12 months. The current index shows a continuous decline over three months, six months and 12 months for the retail sector, as well as for services. In contrast, it shows steady improvements over three months, six months and 12 months in manufacturing. The future index does not show any steady stream of sequential deterioration; however, it shows steady improvement with gains on all three horizons for services, for manufacturing firms, and for employment conditions.

Reading level evaluations Current- The queue percentile readings calculated on data back to 2002 show the current index at a standing of 53 percentile, above its historic median; however, there are below median readings in retailing and services and for employment - with employment having a particularly worrisome, weak standing in its 29th percentile. That means that the employment reading has been weaker than this, only about 29% of the time. In terms of strong standings, only eating and drinking establishments have a standing above the 80th percentile with an 87.7 percentile standing.

Future- By comparison, the future index has a stronger headline standing at 58.9 percentile and has two component readings with standings in their 80th percentiles for eating and drinking establishments and for services. The future index has two relatively weak readings that are below their 50th percentile mark; those are for housing and for employment. The housing standing is in its 34th percentile, a relatively weak standing; employment doesn't do much better with a standing at the 43.9 percentile.

A difficult employment scenario Employment scores out as weak in both the current and in the future standings although the future metrics show that employment has been improving over three months, six months and 12 months; in the current survey, employment only improves on balance over three months. Moreover, in the current survey the employment diffusion index falls by nearly a point month-to-month, while in the future survey the employment reading gains by nearly a point.

Summing up The economy watchers index shows a relatively broad weakening for conditions in September. While the economy watcher indexes continue to log levels above their historic medians, both the future and the current standings are showing some degree of decline in activity in September. Manufacturing tends to be a bellwether industry for Japan; it shows consistent improvement over 12 months, six months and three months in the current survey as well as in the future survey And manufacturing has above-median standings in both surveys although the standings are particularly strong; on the future reading has a diffusion value above 50. Because of the declines in September, we have to mark the survey overall as disappointing; however, there are some positive aspects in the report, particularly for the manufacturing sector.

Industrial output in Germany rose by 2.9% in August compared to July; consumer goods output was flat, capital goods output surged by 6.9%, while the output of intermediate goods ticked up by 0.1%. The gain in output clearly is being carried by capital goods in August reflecting that sector’s turnaround from a sharp drop in July.

Monthly patterns The monthly output figures for July show that German output fell in all major categories a month ago, so the August report is substantially a rebound report. However, in June output was broadly higher as it rose in all categories except for consumer goods output, where it fell by 0.9% on the month.

Manufacturing and industry: Sequential growth in output Sequential growth rates show headline output in Germany on the road to repair; while the road may not be long, it still is winding. Industrial output fell by 2.5% over 12 months. That led to a 3.5% annual rate drop over six months as the sector weakened further, but then it jumped to a 6.7% annual rate increase over three months. Over the same sequence of months, the output of consumer goods drops at progressively faster growth rates. On the other hand, capital goods show acceleration and progress on this same timeline; after falling by 1.1% over 12 months, capital goods output rises by 2.4% at an annual rate over six months, and then explodes at a 23.9% annual rate over three months. Intermediate goods output declines over all horizons, dropping by 5.6% over 12 months, dropping even faster at a 7.5% annual rate over six months, then trimming the decline pace to minus 2.8% over three months.

Construction Construction also shows an uneven path with output dropping in August and in July and with sequential growth rates for construction falling over six months and 12 months but then eking out a small gain over three months.

Industrial surveys Industrial surveys for Germany show slowing. These gauges in August compared to July are weaker across the broad. The August values are also weaker than their June values. Sequential averages of these industrial surveys show some creeping improvement in the ZEW survey, little change in the IFO manufacturing survey, some small tendency for improvement in IFO manufacturing expectations, while the EU Commission industrial index for Germany progressively weakens from its averages over 12-months to six-months to three-months.

Other Europe (Four early reporters) Industrial output in four other early reporting European countries shows increases in output for France and Portugal, contrasted to declines for Spain and Norway. None of these countries have two months in a row of output gains or output declines in August or July. June is another month in which output increases in two of them and decreases in two others. The recent monthly readings of output in Europe have been uneven. Sequential calculations for output in these countries shows manufacturing staggering towards better days in France where output posts a 10.4% annual rate increase over three months, following weak and uneven performance over six months and 12 months. Spain shows clear progressive deterioration with output moving from a 3.7% decline over 12 months to a 19.4% annual rate decline over six months to a 27.1% annual rate decline over three months. Portugal follows that progression but with negative growth rates that are about half of the ones posted by Spain. Contrarily, Norway shows progressive acceleration from their 3% growth over 12 months to a 9.1% annual rate increase over six months, and to a 12% annual rate increase over three months.

Quarter-to-date With all the monthly volatility, the quarter-to-date progress is not a given. It turns out to be negative for overall industrial production in Germany as well as for all three major sectors and construction. Real manufacturing orders are increasing in the quarter, despite falling in August; they are rising at an annualized quarterly rate of 16.9%. Real manufacturing sales, however, make a gain in August after declines in June and July but log a 6.6% annual rate decline in the quarter to date. The four industrial surveys for Germany show declines in the quarter-to-date compared to the previous quarter for three of the four metrics. Industrial output in the four other early reporting European countries shows exactly what you would expect: two increases versus 2 declines among the four reporters.

Queue standings over 24 years The queue standings that rank either growth rates or survey levels over the last 24 years shows rankings up and down the line regardless of whether it's a growth rate or a survey value compared to its history with rankings under 50%- with one exception. Industrial production in Norway has the year-over-year growth rate that ranks in the 70th percentile (the top 30% of all its historic growth rates). However, apart from Norway, the strongest rankings in the table are for industrial production in France with a 45.9 percentile standing, and in Portugal with a 43.4 percentile standing. For Germany, the strongest sector growth rate as a standing in the 29th percentile and that's for capital goods output. German real manufacturing orders have a 23.3 percentile standing, real sales in manufacturing have a 17.4 percentile standing, ranked on the level of their surveys in August. The various 4 surveys in the table have rankings that range from a high of 14.2% for the ZEW current index to 4.9% for IFO manufacturing output.

Summing up Despite a nice bump up in output in August, there is little here to bend trends higher or buoy expectations. Output growth and industrial rankings are still weak. European countries are mired in the same weakness as Germany. Conditions remain touch and go in an environment with a deteriorating geopolitical background and lingering inflation that is keeping central bankers wary, and for a time, back on the sidelines on hold despite being in easing cycles.