Economy in Brief

Japan's economy watcher index improved in November. The future index also improved in November; however, both the current and the future indexes continued to produce readings below 50 indicating that contraction remains the order of the day.

Economy watchers indexes remain weak These indexes have been skimming below the level of 50 for some time (3-month, current; 9-month, future). Weaker, yes, however, not by much. There is mild contraction indicated in both the current state of the economy and the expected future state of the economy. However, this is not an entirely unusual situation because the ranking of the current index is a 64-percentile standing which indicates the diffusion index is above its median which also sends home the message that a below-50 reading has some sense of normalcy to it for Japan (evaluated on data since 2003). The same is true for the future index, at 49.4, is below 50 and has a queue percentile standing at its 56.5 percentile, above its median for this same period.

Current Index The current index has month-to-month index changes that are mid-range for a diffusion score of 50%. But October and September have diffusion scores below 50, showing more indexes are weakening month-to-month than are strengthening. Sequentially, the readings are compared on a period-average-to-period-average basis. The 12-months average improves in 90% of the components compared to the average of 12-months ago. Comparing the 6-month average to the average over 12 months shows that no sector improved. Comparing the 3-month average to the six-month average across line items, 60 percent of the sectors improved.

Future Index The future index improved broadly month-to-month in November with a diffusion reading in November at 80%, up from only 10% in October and 30% in September. The diffusion reading on the future index over 12 months, 6 months, and 3 months, are similar to the pattern of the current indexes. There is strong breadth over 12 months, no improvement over 6 months compared to 12-months, and a reading showing 60% improvement over 3 months compared to 6 months. Note that these metrics are different from the period-to-period change in the table that is constructed from point-to-point data (not averages). But the signals really are quite similar (except for the 12-month point-to-point results, that show broad weakness in contrast the broad strength signal by comparing averages).

German IP fell by 1% in October, led by declines of 1% in consumer goods output, a 0.4% decline in capital goods output, and a 0.4% gain in intermediate goods. Output had fallen and fallen sharply across the board in September. That fall was one of the main reasons that expectations this month were slated for a bounce-back.

Despite this, the pace of decline has slowed over three months. German IP falls by 4.7% over 12 months; it drops at an annual rate of 9.1% over six months and then drops at a three-month annualized rate of 1.8%. Consumer goods output comes closer to having an ongoing accelerating decline in progress. Capital goods output declines at a 4.9% pace over 12 months and declines at an 8.1% annual rate over six months then shifts to log a strong 9.8% increase at an annual rate over three months. In contrast, intermediate goods output shows declines on all horizons without and clear trend beyond that.

Surveys for German industrial performance generally get weaker from 12-month to 6-month to 3-month, except for IFO manufacturing expectations that fluctuate and side-slip. France, Spain, Portugal, and Norway report early IP data for October. Sequentially, only Spain has a pattern and that is accelerating. The rest show fluctuation but three of the European countries (exception, Norway) show IP rising over three months.

Still, the queue standings for the various metrics in the table are uniformly low. Among the 18-rankings in the table, only three of them stand above their 50-percentile which puts them above their respective historic median year-over-year gains. Spain and Portugal show historical strong manufacturing IP gains while for Germany real orders have a standing above their historic median.

On balance, it is another disappointing economic report for Germany. The manufacturing sector remains under pressure although there is some evidence of slightly better growth in other European economies. For the most part, the quarter-to-date readings show ongoing weakness.

German real orders fell by 1.5% in October after a surge of 7.2% in September. However, the September surge had followed a plunge of 5.4% in August. The German order series have been extremely volatile with volatility present both in the foreign series and in the domestic series. Foreign orders rose by 0.8% in October after jumping by 9.3% in September; that followed a 1.9% drop in August. Domestic orders fell by 5.3% in October after rising 4% in September. The September gain followed a 10.1% drop month-to-month in August. These have been extremely volatile times for orders.

Sequential order patterns- Sequentially orders are up 5.8% over 12 months; they’re up at a 14.2% annual rate over six months but now they’re falling by 0.4% over three months. Foreign orders show a continuing strong and even accelerating trend with orders up by 13.7% over 12 months, then rising at a 25.4% annual rate over six months, stepping up to a 36.5% annual rate over three months. In contrast, domestic orders fall by 5.3% over 12 months but then trim that rate of decline to -1.5% at an annual rate over six months. However, over three months German real domestic orders are falling at a 38.5% annual rate. As you can see, the weak domestic orders and the strong foreign orders nearly cancel one another out with an overall order result of minus 0.4% over three months.

Sales trends- Sales trends show a little bit more stability but still some volatility. Here we will focus on total manufacturing sales. Manufacturing sales fell by 1.2% in October after falling by 1.1% in September; in August real manufacturing sales had risen by 3%. I will not detail the growth rates here; you’ll find them in the table. However, looking at sales growth rates for consumer goods, consumer durables, consumer nondurables, capital goods, and intermediate goods, you see across each one of these sectors a significant amount of volatility in sales month-to-month from August to September to October.

Sequential real sales- Sequentially manufacturing sales fall by 3.8% over 12 months; they step-up to a decline of 5.5% at an annual rate over six months and then, over three months, there’s a turnaround in the trend as real sales rise at a 2.6% annual rate. Overall consumer goods, capital goods, and intermediate goods show declines in sales over 12 months and over six months. Over three months, consumer goods sales make a small decline, while capital goods sales surge at an 11.4% annual rate, and intermediate goods sales rise at a 4.2% annual rate. The turnaround and stability to overall real sales by sector owes substantially to capital goods, and to some extent intermediate goods, where sales have firmed up over the last three months after having a legacy of declines over six months and 12 months.

Europe – Beyond Germany The bottom of the table looks at industrial confidence readings from the European Commission for Germany, France, Italy, and Spain. All the readings for the last three months are negative readings and for each of the countries there’s a deterioration in October compared to September. All countries also showed deterioration from August to September. Spain in September is an exception. The sequential readings from 12-months to six-months to three-months show German industrial readings are negative and getting worse in each horizon. Italian readings are negative and getting worse on each shortened horizon as well. French readings are negative over 12 months; they’re worse over six months but then improve by just a tick over three months compared to six-month readings. For Spain, readings are negative and all the periods; however, they improve over six months compared to 12-months and then they improve again over three months compared to six-months although these improvements are stepwise small changes.

Quarter-to-date- The quarter-to-date readings show that orders are increasing early in the fourth quarter at a 7.5% annual rate. Foreign orders are surging at a 43.6% annual rate and domestic orders are contracting at a 32.1% annual rate. Total manufacturing sales are falling at a 5.6% annual rate in Germany with consumer goods sales rising 2.6% at an annual rate. Intermediate goods sales are up at a 2.3% annual rate and capital goods sales are falling at a 1.6% annual rate.

Europe’s rankings- For the industrial data, I present the queue standings for Germany, France, Italy, and Spain. We see Germany with the lowest industrial queue standings in their bottom 5.6 percentile. France stands in its 12.5 percentile; Italy stands in its 18.4 percentile; Spain has the relative strongest readings with a 32.7 percentile standing which puts Spain as the strongest respondent in the table even though in the lower third of its own historic queue of industrial readings. All of these are extremely weak readings, and these are the four largest economies in the European Monetary Union.