Economy in Brief

Industrial production in the European monetary area fell by 0.1% in April after climbing by 0.5% in March and 0.1% in February. For manufacturing the April fall was greater at -0.4% although March had posted a gain of 1% and February’s gain is 0.8%. Uptrends are still intact for the headline excluding production as well as for manufacturing.

Sequential growth rates for overall industrial production excluding construction show a decline at a 2.9% annual rate over 12-months, a gain of 0.2% at an annual rate over six-months and the three-month rise of 2.1% at an annual rate - a progression showing improvement for manufacturing. The manufacturing drop is also 2.9% over 12-months, the six-month rise is at a 1.2% pace and the three-month gain is at a 5.9% annual rate, an even stronger progression toward better growth.

In April Euro-Area manufacturing sectors showed increases month-to-month except for intermediate goods that logged that a decline of 0.4%. Consumer goods output rose by 0.3% led by nondurables and capital goods registered an increase in output of 0.7% month-to-month.

The growth rates for manufacturing sector show clear acceleration only in capital goods where output declined by 4.8% over 12-months, then deduced its decline to a 3.8% annual rate over six-months but then exploded to a 15.3% rate of increase over three-months. By comparison consumer goods output shows revival but not clear acceleration, gaining 0.4% over 12-months accelerating to a 4.4% pace over six-months but then slowing to a 3.5% annual rate over three-months. Consumer durables are a marginal candidate for acceleration as output falls at a 3.4% annual rate over 12-months and a similar 3.8% rate over six-months, but then shifts to a gain at a 3.8% annual rate over three months. Consumer nondurable goods show increases on all three horizons, but output gains slow over three-months compared to six-months. Intermediate goods output shows declines on all three horizons; the declines are gradually diminishing but not sequentially diminishing.

Quarter-to-date growth rates for industrial production show headline production rising at a 1.7% annual rate early in the second quarter compared with three-point 3% annual rate gain for manufacturing. Both consumer output and capital goods output are rising at double digit rates, consumer nondurable goods are advancing at 8.4% annual rate; only intermediate goods output is declining on the quarter-to-date, falling at a 2.8% annual rate.

Comparing output levels, the level of output on January 2020 shows overall output is still 1 1/2 percentage points below what it was over four years ago in January 2020. Manufacturing output is still lower by a little less than 1/2 of one percentage point. Durable goods output is lower by about two percentage points, while intermediate goods output is lower by about 7 percentage points. Capital goods output is slightly higher by about six-tenths of a percentage point; nondurable goods production is higher by 7.7 percentage points. Consumer goods overall show production higher by nearly seven percentage points. The consumer is king.

We rank the performance of industrial production by its year-over-year growth rates as well. On performance back to 2007 total output and manufacturing output rank around their 18th percentile, that's in the lower one-fifth of their historic queue of growth rates - a poor performance. Consumer goods output overall has a 42-percentile rank, consumer nondurables output is the strongest industrial category with a 48.8 percentile standing, close to its median, but just below the median reading at 50%. Intermediate goods rank at about their 34-percentile standing just above the lower 1/3 of their historic queue of results. Capital goods output during this period has been especially weak, having only a 13.2 percentile standing, when ranked against its historic year-over-year growth rates.

The chart above actually provides a good summary and description of what's happening. It shows that the various sector growth rates are still contracting, however, it shows progress being made by intermediate goods and consumer goods while it shows there's still erratic performance in the capital goods sector. The capital goods sector has been especially important to the German economy that continues to flounder. This report suggests that there is improvement in train and that Europe's industrial sector also remains irregular. Improvement is still in train. In the unfolding quarter it appears the growth is beginning to take hold.

Monthly German inflation has been volatile with the HICP headline logging -0.3% in March, surging by 0.8% in April, and gaining 0.2% in May. The HICP Core rose by 0.2% in March and by 0.3% in each month, April to May. The domestic CPI has been steadier monthly and better-behaved. Still, among the four measures, German inflation over three-months still runs too-hot at annual rates ranging from 2.8% to 3.6%.

Sequentially these four inflation paths for HICP Vs the CPI and for headlines Vs the cores show either inflation stuck at a pace too-high or at a pace too-high and still accelerating. The HICP headline rises by 2.8% over 12-months, steps up to 2.9% over 6-months, then steps back down to 2.8% over 3-months. This contrasts to the domestic CPI measure that runs cooler but shows acceleration gaining 2.4% over 12-month and six-months then steps up to 2.7% over three-months. Both core rates at least ‘tend-toward’ acceleration. The HICP core is at 3.3% over 12-month and rises to 3.8% over 6-months and 3-months. The Core domestic CPI gains 2.7% over 12-months steps down to 2.6% but then steps up to 2.8%, a three-month pace above the 12-month pace.

In addition to the sequential trends in the table described above, the chart shows a progression of year-over-year rates, 6-month rates and three-months rates. Viewed as time series all these profiles have stopped falling and each is up from its cycle low and at least ‘stuck’ if not accelerating.

The ECB, of course, targets EMU inflation not German inflation. But Germany is the largest EMU economy, and its results get the largest weight in the inflation index the ECB does target. Having German inflation this stuck, or accelerating is not good for EMU.

The details of German inflation data look better (these derive from the domestic CPI series). We see inflation is accelerating in fewer than 50% of the categories over each month February to March, March to April, and April to May. That is very good news. Over the broader sequential timeline, inflation accelerates compared to its year-ago pace in only 18% of the categories. Over six-months, however, a time horizon when the CPI did not accelerate compared to its 12-month pace, and the core actually weakened, the breadth of inflation rose sharply to 72.7%! It was accelerating in nearly three-quarters of the categories. But that broad acceleration did not impact the headline results much.

All that simply points out that inflation has many dimensions; its calculation will depend on the period one chooses to measure it, the index one uses to describe it, and that, in turn, will involve the application of a weighting scheme. When inflation is not broadly experienced across index components but is embedded in components with large weights it may hit the index harder than breadth would imply. For this reason, I like to look at inflation on several measures and across various horizons.

A perspective on German Inflation When we take this eclectic approach for German inflation we see some good news at the grass-roots level as accelerating inflation does not appear to be broadly experienced. However, it is intense enough in categories with large weights to keep the inflation metrics pressured. The good news is that the hint at inflation acceleration is weak. The diffusion data suggest underlying pressures may be more isolated rather than spreading and it may be that some of the lumpier categories shed trend tendencies more slowly. For the time being, the German inflation data are not good news and they do show inflation stuck too high.

A Global Phenomenon Not to be Dismissed Stuck inflation is also part of a global phenomenon, so I would be reluctant to dismiss ‘sticky inflation’ and to treat it as transitory phenomenon that will eventually behave itself. We have already seen that mistake made once. There seems to be a lot of wishful thinking by central bankers these days. A nice long period of inflation containment and success has immediately brought people to the conclusion that all the sweat, toil, and sacrifice taken to get inflation low in past years was perhaps, unnecessary. Many now seem to believe that inflation will behave all on its own. But there is little evidence of that. And with global conditions shifting and China no longer competing to export goods as aggressively (or being allowed to) and with the geopolitical shift going to the display and acquisition of global power, influence, and territory, the peace dividend is certainly spent. Government budgets are more likely to be too-fat than too-thin. This means monetary policy is going to have to go ‘back to work’ to provide a counter-weight instead of resting on its past laurels. And few seem to appreciate that.