Quantitative Macro | EMU Industrial Production
Strong gains in IP
Industrial production in the European Monetary Union rose by 2.6% in March with manufacturing output up by 2.5% I'll put a manufacturing rose across all of the main manufacturing sectors led by a 3.2% month to month gain in capital goods output with intermediate goods output at 0.6%, the weakest sector increase.
Survey vs accounting data - very different stories: There's another interesting nugget in this report… I summarise, using text descriptions, the behaviour of the PMI gauges for EMU. Comparing the recent three-months of data as well as readings over the three sequential periods, what we see is that, while output in the monetary union is rising and rising strongly and accelerating over this time profile in IP data, the S&P PMIs for manufacturing in the monetary union are below 50 in each of the sequential time periods as well as each of the recent months – that is quite a disconnect. We look at these PMI gauges largely because they are the earliest data that we have on economic statistics. But here we have an example of how the accounting data that reflect output numbers that are counted up by national statistics bureaus compare to privately generated survey data that are inferential. We find that the two series give us very different results. The PMI data are useful and can often be early warning signs of things changing direction, however, for the Euro-Area it's clear that the PMI data have been unduly pessimistic over the last year. Meanwhile, in the US, the point is being made that the survey style data (sometimes called ‘soft data’) have been much weaker. Perhaps this is a warning that you should be aware you're placing too much emphasis on those data.
Quarter-to-Date: Output to date in the current quarter is also strong but the headline series is up at a 9% annual rate. Manufacturing is up at an 8.3% annual rate and the only consumer durable goods are showing a decline in output in the quarter. Rankings of year-over-year growth rates on data back to mid-2007 show the current year-over-year growth rate rankings above their respective 50th percentiles, which means they're above their historic medians for this period. This is true for all the EMU-wide characteristics except capital goods.
Some output declines linger, but they do not dominate - Country level data for 13 monetary union members focus on the manufacturing sectors and show 5 manufacturing sectors with output declining in March, in February, and in January, out of 13 reporting countries that is not extreme but is significant. Looking at the 3-month, 6-month, and 12-month periods, output contracts on those horizons and only for three to four of the reporting countries. Among the four largest monetary union members only Italy shows output declines sequentially and those declines are for 12-months and 6-months as Italy posts a strong, 7.2% annual rate increase, over 3-months.
Only three monetary union countries show quarter-to-date declines; these data are now complete data for the quarter. Countries with declining output QTD are Spain, Malta, and Greece.
However, all is not completely well in the monetary union… when we rank IP growth rates on data back to June 2007, the three largest monetary union economies show growth rates that rank below their historic medians. Only Spain, among the largest economies, has a growth rate that ranks above its historic median and that's by a narrow margin with a ranking of 51.4%.
On balance it's a good manufacturing report for Europe in March. This report shows manufacturing sector to be in solid shape despite all of the concerns and drum beat of weak readings form the PMIs. These data, of course, draw from the period before tariffs were mooted, implemented, and then reduced, so there still may be a bumpy road ahead for industrial output. But we can see that, as of March, conditions are fairly strong for output in Europe, which will continue to be underpinned by the fact that Europe will be spending more to provide for its own defenses from here on out. The tariff impact, whatever it is or isn’t, lies ahead.