German Industrial Demand, US Consumer Confidence, HK's PMI and China Demand

Here are three loose ends from last week's economic data worth a moment's reflection:

• German Industry Demand: The wildly contradictory lessons from very weak industrial production but very strong factory orders in October on balance suggests a short-term upward industrial inflection point.
• US Consumer Confidence: The collapse in December's consumer confidence measures - part post-election buyer's remorse, partly the shadow of the fiscal cliff - will probably be effaced by the slowly improving underlying fundamental dynamics of domestic demand.
• Hong Kong PMI:  November's PMI broke out and up from trend - Hong Kong is catching the leading edge of China's modest domestic demand recovery.  At the least, it justifies the Hang Seng's rally.

1.Germany Industrial Demand  It is no exaggeration to say that the industrial news from Germany this week was the most contradictory in its 21^st century to date. On the one hand, industrial output fell by 2.6% mom in October, which was the steepest monthly fall since April 2009. But at the same time, factory orders jumped by 3.9% mom – the steepest rise since January 2011. 

The contradiction between the two is intense: output of capital goods fell 4.3% mom, but orders for capital goods jumped 4.5%; output of intermediates fell 1.1%, but orders for intermediates rose 3.4%; output of consumer goods fell 0.9% mom (and 6.2% for consumer durables) but orders for consumer goods rose 2.1%.

What to make of the contradiction? Construct an orders/output index from this data, and you find the October combination has generated the single biggest monthly leap so far this century, returning the index to ‘normal’ levels. This index isn’t quite a book-to-bill ratio, but it is closely related, and in the past has anticipated near-term changes in direction of German output. The upshot is that the succession of grim output data from Germany (four contractions in the past five months) looks likely to be reversed in the coming 2-3 months. 

2. US Consumer Confidence  The looming fiscal cliff has meant that buyers’ remorse is more likely to feature in confidence surveys than any post-election surge in hope. And so it has proved, with both the Uni of Michigan’s preliminary reading and then the RBC Consumer Outlook index for December both slumping to the lowest levels since August, worse than expectation and trends respectively. The preliminary Michigan survey isn’t rich in detail, but December’s fall reflected a collapse in the economic outlook index to 64.6 from 77.6 in November – the biggest single-month reversal since March 2011, leaving the index 2.2 SDs below the 2001-2007 average.  The RBC survey was less clear-cut, the fall in the index was driven simply by a downward revision in spending plans, whilst employment expectations and investment plans deteriorated only mildly. 

How seriously should one take this reversal in December’s confidence surveys? Two things to bear in mind. First, they are interrupting a modest but by now fairly entrenched recovery in hard domestic demand data, visible since August.  The statistical nonsense of Nov’s unemployment rate aside, non-farm payrolls are growing around 1.4% a year (and about half a standard deviation above post-financial crisis norms), although this is not accompanied by real wage growth; auto sales by November were running at 21.6% yoy; and October’s retail sales grew at 4.6% yoy, with underlying 6m momentum trends turning positive for the first time since May. 

Second, even after the shocking falls in December, confidence is still higher now than it was throughout most of the last two years, reflecting a slow and steady recovery. It was the spikes in confidence  during October and November that look anomalous as much as  December's relapse.

Third,  since mid-2011, confidence surveys have done a very bad job in tracking the trends in domestic demand.  Provided the fiscal cliff is negotiated, one should place more faith in the hard data trends than in these confidence surveys.

3. Hong Kong PMI, China Demand and HSI Hong Kong regularly catches the winds from China, and the mild breakout from trend in November’s PMI echoes the improvement in domestic demand data from the mainland. In fact, at 52.2 HK’s PMI was above the l/t series average of 51.1 and was the strongest improvement in nine months.  New orders rose for the first time in four months, helped by new orders from China. Although input prices rose at the fastest pace in eight months, firms were able to raise their output prices for the second successive month, at the fastest pace since Oct 2011.  Meanwhile Chinese domestic demand data continued to recover in November, with retail sales rising 14.9% yoy and industrial production rising 10.1% yoy – both faster than consensus expected. 

If China is the underlying factor driving Hong Kong’s PMI, the result shows up in the Hang Seng Index: between January 2008 and November 2012 monthly changes (first difference) in the PMI and the Hang Seng have a correlation coefficient of 0.43, which sails through a 1% significance test. Sadly, though, these two seem to have a strictly coincident relationship, with no useful leads or lags. The best that can be said is that HK’s strong November PMI does not contradict or undermine the Hang Seng rally.