US Industrial Vulnerability, Germany's Contradictory Confidence Readings - Two From Last Week

Last week's data provided more than two things to ponder, but the two I've chosen to highlight are:

1. The continuing weakness of US industrial data, turning up in regional surveys for October
2. The contradictory state of Germany confidence indicators: business and industrial surveys are showing severe deterioration, whilst consumer confidence surveys report continuing improvements. This divorce between industry and consumers won't last.

1. US Industry Surprises from the US in the last few weeks have tracked the recovery of consumer confidence, vehicle sales, housing market, and, on balance labour markets. But October’s regional manufacturing surveys from Kansas and Richmond provided a reminder that the industrial side of the economy remains very weak. In particular, Kansas’s survey was the weakest since mid-2009, driven mainly by a steep fall in new orders (minus 11 vs minus 2 in Sept), orders backlogs and more steeply falling exports. In the Richmond survey, although the headline result (minus 7) wasn't particularly unusual, all broad indicators were in retreat - shipments, orders, employment and capacity utilization. 

The underlying problems is that the momentum of industrial production remains more robust than that of sales and inventories combined, and there is little support from export markets to take  up the slack. In non-recessionary times, manufacturing and trade sales typically grow at a yearly rate about 5 percentage points higher than industrial output. By August, however, on a 3m basis, manufacturing and trade sales were running at 3% yoy, whilst output was growing 3.8%. For capital goods (non-defence, ex-air) shipments  have fallen in mom terms for each of the last three months. 

With neither a vigorous inventory cycle (total business inventories rose 5% yoy 3ma in August) or exports growth (they contracted 1.6% mom sa in both August and July) to soak up the difference, the likelihood is for repeated bouts of industrial weakness. The chart displays the problem in momentum terms: the last two times this mismatch between output and sales momentum opened up, recession followed.

2. German Confidence The week brought contradictory readings of German confidence.  On the one hand the October GfK Consumer Confidence rose to its strongest level since pre-crisis mid-2007, primarily on the basis of a rise in income expectations. But this was offset by a continuing fall in the Ifo Business Climate Survey to its lowest point since the start of  2010, led by a fall in the manufacturing climate. 

The findings were confirmed in this morning's European Commission October survey of business and consumer sentiment. Germany's industrial confidence index fell to minus 18.3 (from minus 15.9), and its service sector confidence evaporated (0.7 in Oct vs 5.4 in Sept). But at the same time the consumer confidence reading improved to minus 9.3 from September's minus 10.3.  

Now it is unlikely that this divergence in view between consumers and industry will or can be maintained for long. Historically, German income expectations have tracked (and, on the upside, anticipated) changes in employment. But for the last two months, Germany’s measured employment has been flat, with increasingly negative momentum, and October’s Manufacturing PMI also found renewed job cutting. 

Conclusion? The reported strength of German consumer confidence is vulnerable in the short term, and with it German retail sales (up 1.2% yoy in August) and vehicle sales (down 10.9% yoy in September).