German factory orders rise 2.5 percent in July but fall 1.4 percent without large orders
New orders in German manufacturing rose 2.5 percent in July on a seasonally and calendar adjusted basis, the federal statistics office reported on 4 September, and fell 1.4 percent once large scale orders are stripped out. The gap between the two readings is 3.9 percentage points, on our calculation, and it is the whole story of the release.
The office is explicit about the cause, stating that the positive development in July “is almost entirely attributable to the growth in the ‘manufacture of other transport equipment’ sector”.
One sector up 126.4 percent, the largest sector down 12.5 percent
That sector, which covers aircraft, ships, trains and military vehicles, recorded a 126.4 percent monthly increase on an exceptionally high volume of large orders, particularly in ships, railway rolling stock and aircraft. The automotive industry fell 12.5 percent, which the office names as having had a negative impact on the overall result in particular.
| Manufacturing orders, July | Change |
|---|---|
| Headline, month on month | +2.5% |
| Excluding large scale orders | -1.4% |
| Three months on three months | +2.9% |
| Three months, excluding large orders | -2.2% |
Provisional, real, seasonally and calendar adjusted. The three month comparison covers May to July against the preceding three months. The signs reverse on both horizons once large orders are removed, a 3.9 point gap on the monthly measure and 5.1 points on the quarterly one, on our calculation.
The year on year figure is 13.1 percent, calendar adjusted, and June was revised up to 3.7 percent from a provisional 3.1 percent.
Domestic strength, foreign weakness, and a 22.2 point split inside the foreign number
| Orders by origin, July | Change |
|---|---|
| Domestic | +9.1% |
| Foreign, total | -2.1% |
| Foreign, euro area | +12.1% |
| Foreign, outside the euro area | -10.1% |
Month on month, seasonally and calendar adjusted. The euro area and non euro area readings are 22.2 percentage points apart, on our calculation.
That split is the second finding in the release and it points the same way as the first. A foreign order book down 2.1 percent in aggregate contains euro area demand up 12.1 percent and demand from everywhere else down 10.1 percent, so the modest headline decline is a net of two large opposing movements rather than a broad softening.
By category, intermediate goods rose 4.3 percent and capital goods 2.4 percent, while consumer goods fell 4.8 percent.
Turnover moves the other way
Manufacturing turnover fell 1.5 percent on the month and 0.6 percent on the year, with June revised to a decline of 0.5 percent from a provisional decline of 1.3 percent.
Orders and turnover diverging by 4.0 percentage points in the same month, on our calculation, is what a large lumpy order book looks like before it converts into production. Ships, rolling stock and aircraft are delivered over years, so a July order surge in those categories does not reach turnover in July, or in the following quarter.
Why it matters: The German order book is one of the more reliable early indicators of euro area industrial activity, and July’s headline says the opposite of what the underlying data say. Read alone, 2.5 percent suggests recovering industrial demand. Read against the ex large orders figure of negative 1.4 percent, against automotive at negative 12.5 percent, and against turnover at negative 1.5 percent, the month shows underlying order demand weaker than the headline suggests, with a single large transport order layered on top. The three month comparison settles the question, because it is designed to smooth exactly this kind of distortion and it also reverses sign, from positive 2.9 percent to negative 2.2 percent once large orders are removed. For anyone reading German industry as a proxy for European demand, the euro area split matters more than the headline: orders from within the currency bloc rose 12.1 percent while orders from outside it fell 10.1 percent, which raises a question about demand from outside the currency bloc rather than answering one about domestic recovery.
Outlook: The test is the August and September prints, because a 126.4 percent monthly gain in one sector cannot repeat and its absence will pull the headline down mechanically even if underlying demand is unchanged. Watch the ex large orders series through that, since it is the only line in the release that has been consistent across both the monthly and quarterly horizons. Automotive is the second thing to follow: a 12.5 percent monthly fall in the largest manufacturing sector is not explained by the release, and whether it reverses determines whether the underlying negative readings are a level shift or a single weak month. The turnover series will lag orders regardless, given the delivery profile of ships, rolling stock and aircraft, so a gap between the two should be expected to persist rather than close quickly.
Sources: Federal Statistical Office of Germany.
