Eurostat’s July print: capital goods up, headline down, and what it means for demand

Eurostat published its July figures on 16 September, and the headline looked like another soft month: euro area industrial production down 0.1 percent against June, with the wider EU down 0.3 percent. Year on year the euro area was flat and the EU up 0.3 percent. Taken alone, those numbers invite a shrug. Look one level down into the category breakdown and a rather different picture emerges, because the minus sign on the headline is being produced almost entirely by a part of the economy that has nothing to do with rotating machinery. For anyone forecasting component demand — bearings, belts, chain, seals — the aggregate index is close to useless and the sub-indices are where the signal lives. July is a good month to make that point, because the two halves of the release point in opposite directions with unusual clarity.

The headline is being dragged by consumer goods, not by machinery

Within the euro area, non-durable consumer goods fell 1.6 percent on the month, and that single category is large enough to pull the whole index negative on its own. Everything relevant to industrial equipment moved the other way. Capital goods rose 0.5 percent, intermediate goods rose 0.3 percent, durable consumer goods rose 0.9 percent, and energy production rose 0.9 percent. So the economy that buys machine tools, gearboxes, conveyors and pumps expanded in July, while the economy that produces food, beverages and household consumables contracted. A distributor reading only the headline would conclude that the market softened; a distributor reading the breakdown would conclude that their addressable market grew and somebody else’s shrank. Both statements come from the same press release. This is the same divergence we flagged when the June print landed, and it has now persisted for two consecutive months rather than being a single-month artefact.

Capital goods at plus 0.5 percent is the line that touches bearing demand

Capital goods output is the closest monthly proxy available for the assembly of new machines, and it is where new-build bearing content is consumed. A 0.5 percent monthly gain is modest, but it arrives in the same season that the VDMA cut its German production forecast to a 2 percent decline for the year, which is worth holding in mind together rather than separately. The reconciliation is geographic and sectoral: German plant engineering can be contracting while euro area capital goods as a whole edge up, because Spanish, Italian and Irish production are not following the same cycle. For a stockholder, the practical implication is that pan-European demand for the general industrial range is holding while the German OEM channel specifically is not, which argues for keeping depth on the standard bearing range and being selective about platform-specific items. The reasoning behind that split is set out in more detail in our note on the VDMA forecast cut.

Reading it alongside the PMI rather than instead of it

Industrial production is a hard output measure published with a six-week lag; the purchasing managers’ index is a survey published within days of month end. They answer different questions and the common mistake is to treat a conflict between them as an error in one of them. Production tells you what factories actually made two months ago, which is what generated real component consumption and real wear on the installed base. The PMI tells you what purchasing managers felt about conditions last month, which is a better guide to what they will order next. When production is flat and sentiment indices are soft, as has broadly been the case through the summer, the sensible read is a market that is neither collapsing nor recovering — a market where maintenance demand carries the volume and project demand stays deferred. That environment rewards availability over price, because the orders that do arrive tend to be urgent, and it is the same conclusion we reached from the August PMI.

The useful discipline coming out of this release is to stop quoting the headline index internally. If your sales meeting opens with the observation that European industrial production fell 0.1 percent, the room has learned nothing that changes a decision. If it opens with the observation that capital and intermediate goods both grew while non-durable consumer goods fell 1.6 percent, the room can act: hold stock on the general industrial range, expect maintenance-driven order patterns to continue carrying volume, and treat any softness in the German OEM channel as a regional effect rather than a European one. The August figures land in mid-October and will be the first to capture post-holiday production at full rate, which makes them a more honest read on underlying momentum than either July or the summer months either side of it.