Economy in Brief

With the December report, Germany’s production and some of the early European industrial production data reveal a good deal of chaos in terms of the embedded trends. On the month, German industrial production fell by 1.9%, with consumer goods output up by 0.5%, capital goods output falling by 5.3%, and intermediate goods output falling by 1.2%. Among the early reporters in the monetary union—France, Spain, and Portugal—only Spain showed an increase in manufacturing IP in December; however, Spanish industrial production is notoriously volatile.

Broader IP trends in Germany and elsewhere in Europe As for other early industrial production reporters, both Sweden and Norway showed strong-to-solid gains in December and each of them showed two-months of gains in a row. Beyond that, sequential growth rates from 12-months to six-months to three-months show accelerating growth in German consumer goods output against decelerating growth for intermediate goods. Real manufacturing output and real sales show mixed results- no clear trends; however, real manufacturing orders in Germany are off the map strong.

German manufacturing/industrial Surveys German industrial surveys from the IFO for manufacturing shows persistent weakening as well as for IFO manufacturing expectations, and in the EU Commission industrial index in the last three months. More broadly, Germany shows some modest but ongoing step up all of these based on average levels from 12-months to six-months to three-months for IFO expectations and the EU Commission industrial readings with mixed results for other survey readings.

IP trends in Europe For the early reporting EMU members France, Spain, and Portugal, who report industrial production trends, each show mixed monthly trends against ongoing decelerations for manufacturing output over the broader sequential periods (12-month, to 6-month, to 3-month). However, for other Europe, Sweden and Norway, manufacturing trends are steadily accelerating on this broader timeline.

A feeling of ‘Deja- What?’ These combinations of opposed trends mixed with a lack of trends leave us with this sense of confusion about what's going on in manufacturing. For Germany, the extreme strength in orders is reassuring since orders should be forward-looking rather than backward-looking or even contemporaneous. But orders can also be a fickle series and so we'll have to watch it to see if the trends for German orders hold up.

Current quarter-What’s been happening now In addition, current quarter growth for Germany actually looks quite good with industrial production up 3.7% at an annual rate in the current quarter, led by output increases in manufacturing against a decline in the intermediate goods output. Real orders in the quarter are surging at a 44% growth rate, while real sales in manufacturing only had a 0.1% uptick at an annual rate. The industrial indicators for Germany in the quarter show weakness or flatness with the only exception being IFO manufacturing expectations that advanced by a small amount. The three EMU members who report industrial production data show positive growth in the just-completed quarter except for Portugal where industrial production is falling at a 2.9% rate in the fourth quarter. Sweden and Norway, European countries but not monetary union members, show a strong 22% annual rate gain in Sweden against the 3% annual rate decline in Norway.

German real orders in December adjusted for inflation rose strongly again, gaining 7.8% month-to-month after rising 5.7% month-to-month in November. Foreign orders were up by 5.6% in December compared to 5.2% in November. Domestic orders surged by 10.7% in December after rising 6.4% in November and 10% in October.

Real sales Real sales were mixed in December with overall sales falling 1.4% month-to-month mostly on weakness in capital goods sales.

Broad categorical acceleration Many flows are accelerating this month. Sequential growth rates show acceleration. Total real orders accelerate from a year ago, to the current year, to six-months, and to three-months. Sales growth rates for consumer goods, consumer nondurables, and intermediate goods all show accelerations in gear. The exceptions are foreign orders that are not as strong over six months compared to their 12-month growth. And on the sales side, consumer durables sales and capital goods sales are weak.

Quarter-to-quarter Quarterly annualized growth is complete for Q4 with this report. Foreign orders are the ‘weak flow’ expanding at a 13.6% annual rate – certainly not a weak growth rate. But domestic real orders are up at an astounding 101.9% annual rate. The net impact on the total real orders growth is to lift it to a pace of 44.1%.

Order ranking is very strong The table provides two rankings: one based on the level of variables and the other based on its year-on-year growth. The rankings this month for real orders overall, foreign, and domestic orders all reside in their top 80th to 90th percentiles- extremely strong based on level or growth. Sales do not follow suit. This gives us some reason to suspect that there is some lumpiness involved in the manufacturing data as distinct from strength. That will be something to watch. Overall mining and manufacturing sales growth is essentially at its historic median at a rank of 49.8. However, capital goods, intermediate goods and manufacturing sales all have rankings at or above their medians - as high as a 61-percentile standing for capital goods.

Industrial confidence Industrial confidence for Germany, France, Italy and Spain (the EU’s big-four economies) show rankings based on these survey levels that are much lower at the 11th percentile for Germany, the 42nd and 36th percentiles, for France and Italy, respectively. Spain scores better with a 61.8 percentile standing on its industrial confidence measure.

On balance, there is now an accelerating profile that is broad in sales trends and especially strong order trends. Perhaps Europe, under the pressure to stimulate its miliary capabilities, has a core of demand to help drive output ahead more consistently. This is something to watch in the coming months.

Composite PMIs for January show fewer reporters weakening in January compared to December with only about 40% of the reporters getting weaker month-to-month. The sequential data weakening versus strengthening shows that over 12 months 43.5% of reporters weakened, over six months 26.1% weakened, while over three months 43.5% weakened indicating that over this period, and - in recent months as well - the broad sequential periods are showing improvement as the underlying trend for global composite activity.

In January, 5 of 25 reporters had PMIs below a diffusion reading of 50, indicating contraction, compared to none in December and two in November. Over three, six and 12 months, the number of outright contractions varies between 2 and 4 based on average data. The percentile standing for ranked data over the period back to January 2022 shows a 61.7 percentile standing for the average of all of them, and a 61.9 percentile standing for the pooled data median. There is a stronger 85.7 percentile queue standing for an average of the United States, the United Kingdom, and the European Monetary Union where conditions have been firming although slowly..

The queue percentile standings across these 25 reporters’ composite indexes show that nine of them have rankings below their medians on data back to January 2022. Among all 25 reporters, only in France has 12-month, 6-month and 3-month average PMI readings below 50 in each of those time segments. France also has readings below 50 for its composite diffusion in two of the last three months.

When we look at rankings over a period, we also are interested in knowing what the performance has been over that span where we're creating these rankings. On these data back to 2022, only 6 reporters have average readings below 50, indicating persistent contraction. For the composite that's below 50, those reporters are Germany, France, Zambia, Ghana, Egypt, and Kenya. Only Egypt at 48.9 has an average reading below 49. Clearly the sense of contraction across this set of countries is small, moderate, and short-lived. At the other end of the spectrum, there are readings of 55 or greater for Sweden, India, Saudi Arabia, and the UAE; Singapore logs a reading at 54.4 for diffusion value.

The average and median data show that the readings have very gradually been drifting higher; however it's definitely a very gradual phenomenon. Looking at smoothed data, 12-month averages show 10 countries with readings below their respective 12-month averages of 12-months ago. However, only six of these show a reading that's one diffusion point or more weaker than it was one year ago. The biggest step back is from Brazil with a 4.5-point step back; the next biggest is Russia with a 2.1-point step back and Russian of course is engaged in war. There is a step back of about one point reported by Spain, the U.K., the UAE, Singapore, and Qatar. On the same metric, step ups of two points or more include Germany, Sweden, Zambia, and Nigeria with step ups of one point or more in Kenya, Australia, Ireland, and the U.S.

Over the whole 4-year period, the average country was in contraction for 14 months, a bit more than one year, accounting for 28.6% of the time. Over the last 2 years, the average country was in a state of contraction for 5.2 months or 21% of the time. Over the last year, the average country was in contraction 2.2 months or 18% of the time. The time spent under contraction has steadily fallen across the group. Over four years, three countries dominate the contraction with France, Egypt, and Kenya in contraction more than half the time (Egypt 89% of the time; France 71% of the time). Over 2 years, only Egypt and France were contracting more than half the time (Egypt 79% of the time; France 91% of the time). In the past one year, five countries are in a contractive state more that 50% of the time (France<91%>, Egypt<75%,> Brazil<75%>, Russia<50%> and Hong Kong<50%>). France and Egypt have serious structural issues. Only Saudi Arabia and the UAE have experienced no contractions over these periods (Ireland comes close, Singapore comes close, too). The top three countries dominate the contraction profile; that is France, Egypt, and a roving member, accounting for 29% of the contractions over four years, 40% over two years and 53% over the last year. These are countries with structural issues.

On balance, the composite PMI data are improving. On the chart the uptrend is visible, a definite tendency. These metrics are moving higher, but they are crawling at a very slow pace. It's encouraging that this improvement is also occurring in an environment in which inflation is improving or holding stable.