Economy in Brief

German industrial output fell by 2.5% in September. Output decline for consumer goods, capital goods, and intermediate goods. The September drops follow broad-based increases in August that followed widespread and deep declines in July.

Sequentially, output falls 4.6% over 12 months; it falls at a 7.9% annual rate over six months and drops at a 10.7% annual rate over three months. The various sectors generally follow the headline pattern revealing progressively falling output across manufacturing sectors from 12-months to 6-months to 3-months.

The construction sector also is showing steady declines and declines that are getting sequentially larger over shorter periods (persistent deceleration).

In contrast, real manufacturing orders are showing growth and acceleration sequentially. Real manufacturing sales also ‘go their own way’ declining on all horizons without any clear change in speed.

Surveys of the German manufacturing sector were mixed in September compared to August. Survey values in September are generally below their July levels. Average levels of the surveys have generally showed some modest improvement from their 12-month averages to their three-month averages.

France, Spain, Portugal, and Norway are early reports of IP data along with Germany. Spain and Portugal show output increases in September, while there are declines in France and Norway. Sequential trends among these countries are chaotic except for Spain that shows clear sequential output acceleration.

The just-completed third quarter shows declines- negative output growth rates and weakening survey metrics with few exceptions. The exceptions are real orders that rose strongly in Q3 (17.5% annual rate). Output in France and in Norway also showed increases in the third quarter.

However, we also rank all of these metrics on growth rates or levels as appropriate. Only Portugal and Norway have indicators that are above their medians on growth rates calculated over 24 years. German output is in its lower 9-percentile. Real manufacturing sales are at their 11th percentile. But orders are doing better; real German orders, an important forward-looking series, has a 46.2 percentile standing, still below its historic median, but getting closer to the median that occurs at a ranking of 50%.

In October, only six reporters saw their composite PMI measures weaken compared to September. Two of those were large EMU economies, France and Spain. But in the EMU, there still was improvement compared to September. The U.S, U.K., and EMU average has the same reading value as in September. The overall average improved in October to 51.9 from 51.4 in September. The median overall reading also improved to 51.8 from 50.0. Still, there is a net decline for the overall average and median compared to August values. Some improvement month-to-month but not much overall: a one-month improvement, a two-month decline.

Sequentially, looking at average levels, over three months, six months and 12 months, there is little volatility in these readings. The average over three months is slightly stronger than the 12-month average while the median is slightly weaker over three months compared to 12-months.

The queue percentile standings tell a story of ongoing weakness. The standing of the average is at the 49.2 percentile, nearly on top of its four and one half year average. The median value is at its 48.3 percentile. Again, these two measures are below their respective multi-month medians but are also quite near to those medians. The BRIC countries (I exclude Russia so its actually a reading for the BICs) average is at a 69% standing.

There are 13 of 25 reporting jurisdictions that have a queue standing below their medians (below 50%). Among the 12 reporters whose standings are above 50%, the average standing is 64.1%. Among those below 50% the average standing is 35.4%. Interestingly, the performing economies have about 14 percentage points above their median while those that were not performing average about 14 percentage points below their medians.

The OECD leading economic indicators normalized or amplitude adjusted uniformly show that expansion is still underway in the global economy. The OECD-7 metric is up by 0.1% in September for the normalized leading indicators after being flat in August. There are positive expansions indicated over 12 months, six months, and three months. Apart from looking at growth rates, the level of the indicator for the OECD 7 has a 55.8 percentile standing, placing it above its historic median value. For the core group of OECD countries, expansion remains firmly signaled underway, even if not strongly.

The normalized indicator for Japan is flat in September after being flat in August. It shows a decline over 12 months but net increases over six months and three months with a queue percentile standing on the index at 50.7% which barely puts Japan over its median and puts it into growth territory; however, it does stay in growth territory slightly above median growth.

For the United States, the change in the normalized leading indicator in September is zero after zero in August as well. The U.S. has an increase of 0.1% over 12 months; it increases to 0.3% at an annual rate over three months and six months, hardly strong readings. However, the queue standing on the LEI level for the United States has a 57.2 percentile standing, a solid standing, clearly above the historic median (at a 50% standing) and clearly putting the United States into growth territory.

The OECD likes to look at six-month changes in its metrics. The second panel of this table looks at the changes in six-month averages month-to month and the net change over six months over progressive 6-month periods. On this score, we see September and August expansions in the OECD-7 grouping as moderate and consistent increases in September and August. For Japan, there are small consistent increases; from the United States strong increases in September and August. China logs two severe monthly declines. However, over broader periods based on six-month changes, we see increases logged even for China. The exception is having a decline from 6-months ago in Japan in its six-month change. Turning to the queue percentiles where we rank the different regions or countries on six-month growth rates, the OECD 7, Japan, and the U.S. have percentile standings in a range of 55% to 65% clearly above their historic medians while China comes in with a standing at its 39th percentile below its historic median.

The bottom panel of the chart shows the amplitude adjusted leading indicators from the OECD and here we look at the levels of the indicators with levels above 100 indicating normal to above normal growth and levels below 100 indicating below normal or below average growth. We see negative scores for France, Italy, Spain, and China consistently over the last four months. The ratio of the current index to six-months ago provides a negative reading for Spain and for China. The other metrics in the table signal ongoing expansion in the United States, the United Kingdom, Japan, the OECD 7, and Germany. These are relatively broad readings indicating continuity and global growth. However, the growth rates aren't particularly strong. For example, the German index has only at 50.7 percentile standing, the same as Japan's. These are razor edges standings, barely above their historic medians but again signaling growth but growth that is above the historic median value by only a small margin. The OECD 7 has a standing at its 55.8 percentile. Italy, France, and the United States have readings that are in their 57th percentile, again, relatively firm above their historic medians. For now, the strongest reading is coming from the U.K. with a 93.5 percentile standing. Spain and China both have percentile standings below their 50th percentile and are at the mid-30th percentile mark.

In this week’s letter, we focus on political uncertainty and its potential risks to economic growth. We begin with Japan, where the long-ruling Liberal Democratic Party (LDP) faced a significant electoral setback last weekend, losing its ability to form a majority in the lower house, even with its coalition partner's support. This development has sparked a period of political flux, complicating efforts to predict Japan's policy trajectory. Market reactions have partially reflected these concerns (Chart 1), though responses to the Bank of Japan's decision to maintain its current policy settings have been muted (Chart 2), which is understandable given that the outcome was largely anticipated.

The uncertainty surrounding elections extends to the United States, where the presidential race between Donald Trump and Kamala Harris remains too close to call by many measures. Observers are particularly interested in how the election results might impact relations with China. US-China relations have been the focus of various trade-related measures by the US over the past decade, including tariffs and product controls (Chart 3). However, it's worth noting that the US's hawkish stance on China may well persist regardless of the incoming president. On a more optimistic note, expectations for China’s near-term growth have improved (Chart 4), bolstered by a recent series of easing measures from its authorities. Nevertheless, uncertainty lingers regarding the economy's ability to achieve its 5% growth target for the year.

Finally, we examine developments in other advanced Asian economies, where industrial production growth has shown signs of easing in recent months (Chart 5). We discuss the potential implications of continued declines in this growth on exports and, consequently, on the growth rate of these economies, many of which rely heavily on exports as a primary growth driver (Chart 6).

Japan’s lower house elections and the October BoJ meeting Japan’s ruling party, the Liberal Democratic Party (LDP), experienced a significant electoral upset last weekend, losing its majority in the lower house of Parliament. Even with the support of its coalition partner, Komeito, the LDP is now unable to form a majority. This shift puts Prime Minister Ishiba's position at risk, as he may need to seek support from parties outside his usual allies to advance his policy agenda if he remains in office. Given this uncertainty, political maneuvering is expected to intensify in the coming weeks, with a special parliamentary session scheduled for November 11 to elect Japan’s next Prime Minister. In response to the initial news, the yen weakened further, reflecting market concerns, while equities saw a slight uptick (Chart 1).