German Factory Orders Jump 3.1% in June, But Strip Out Big Contracts and They Fell

Germany's industrial sector posted a headline number that looks great and underlying data that doesn't.

Factory orders rose 3.1% in June from the previous month, according to data released Thursday by Germany's Federal Statistical Office, Destatis. That beat market expectations of a 0.5% increase. Compared with a year earlier, orders were up 6.5%.

Strip out large-scale contracts and factory orders actually fell 0.5% in June. This is the key figure for understanding whether ordinary industrial demand is picking up or whether a handful of big deals are propping up the headline.

The pattern isn't new. May's factory orders got revised down hard, from an initially reported 1.9% gain to just 0.3%, with Destatis citing "an amended adjustment for price changes." Two months in a row now, the top-line story and the underlying story don't match.

Where the growth actually came from

The gains were concentrated in a few categories. Orders for computer, electronic and optical products surged 22.7%. Machinery and equipment orders jumped 12.7%.

The automotive sector did post real growth too, up 3.8%.

On the flip side, orders for other transport equipment, including aircraft, ships, trains and military vehicles, plunged 41.7% from the previous month's elevated level.

Capital goods orders rose 6.4% and consumer goods orders climbed 4.2%. Intermediate goods, the stuff that feeds into other manufacturing, fell 2.5%.

Domestic demand up, Europe down

Domestic orders jumped 7.8%, while foreign orders edged up just 0.2%.

Break that down further and it gets more interesting. Orders from outside the euro area rose 10.2%, offsetting a 14% decline in demand from euro-area countries. Germany's own eurozone neighbors are buying less German machinery and equipment, while customers further afield are picking up the slack.

The three-month picture is flatter

Looking at the less volatile three-month comparison, factory orders in the April-to-June period were 1.3% higher than the prior three months. Strip out large orders and that number is exactly flat, 0.0%.

German manufacturing appears to be treading water, propped up periodically by a big contract here or there, but without the kind of broad-based order growth that would signal a genuine industrial rebound.

Manufacturing turnover, a measure of actual sales rather than new bookings, fell 1.3% month-on-month in June and was down 0.4% from a year earlier. Orders and turnover aren't the same thing, and a jump in bookings today doesn't show up as revenue for months.

Both reports on the data flagged the same large-order distortion behind the headline figure, rather than burying the caveat.

Destatis has already shown twice now that its initial headline prints don't hold up well under revision. That's worth remembering before anyone calls this a German manufacturing recovery.