The British politician Benjamin Disraeli said famously: “There are three kinds of lies: lies, damned lies, and statistics.”

It is always tough to get to the bottom of the news when stats are produced, but it is interesting to do some research on German sources and basic economic notions.

In this case, it was announced on Wednesday 8 July that the German Industrial Production had a 3.7 % increase in the month of May 2009, the best monthly result since 1993.

However, when you read German sources, you see that the strongest impulse for these numbers come from ”Automobiles” and “Automobile parts”.

Now, how many do remember that Germany had a “Scrapping” premium (Abwrackprämie) back in January?

Bloomberg wrote then:

“German car sales may increase by about 300,000 vehicles this year as a result of plans agreed by Chancellor Angela Merkel’s coalition to pay premiums to buyers of new low-emission vehicles, PricewaterhouseCooopers LLP said.”

The hike in industrial production is thus merely “inventory rebuilding” (car producers building more cars to replenish their stocks). Economists sometimes believe that these events are leading factors in a recovery, as is explained in the German article by two economists.

However, take a look at this excerpt of a 1991 article from the NYT:

Inventory is a curious concept. Shops always seem to be closed for an annoying inventory just when you are in a hurry to buy something hard to find. After Japanese production geniuses invented just-in-time delivery, businesses learned to save money by carrying hardly any inventory at all.

Now some exuberant economic seers, unable to find any other notable source of strength in the U.S. economy, are forecasting that a sudden restocking of business inventories will provide a bounce, as it has in most previous recoveries. Even though this argument ignores the last decade’s profound economic changes, ‘Retailers should not accumulate inventories in anticipation of faster gains in demand.’

it has gained some credence on Wall Street and helped underpin cyclical stocks.

Forecasters such as Stephen Roach of Morgan Stanley say a spurt of orders could force-feed the economy to a growth rate of 4 percent in the second half of this year – about twice as fast as that predicted by most economists, including those at the Federal Reserve Board.

These bullish economists argue that factories will have to increase production to fill empty shelves, catching up with the unsatisfied consumer demand left over from this year’s recession as well as the previous two years of slow growth. The perennial optimist, Edward Yardeni of C. J. Lawrence, said current low levels mean “the inventory cycle will soon be a growth booster.”

This is dangerous nonsense to those who speak for factory owners themselves. Jerry Jasinowski, president of the National Association of Manufacturers, said that unless more people go back to work, their incomes can’t grow fast enough to support higher spending. “Retailers should not accumulate inventories in anticipation of faster gains in demand but rather should adhere to a cautious strategy, so they do not get caught with an overhang of unsold goods later on,” he warned.

Mickey Levy of CRT Government Securities said this recovery is very different from previous ones. During the rebounds of 1974, 1980 and 1983, he said, businesses “expected the worst during the recession and cut inventories too far, then dramatically reversed expectations” and rebuilt their stocks.

THE REVERSAL in the last recession was the largest: a panic liquidation of stocks worth U.S. dollars 59 billion during the quarter at the depth of the recession, followed by a U.S. dollars 27 billion buildup during the strongest quarter of the rebound.

This time businesses are acting more cautiously, partly because they expect less oomph after this year’s shallow recession, but especially because of low-inventory discipline they learned from the Japanese. During the 18 months before the economy hit bottom this winter, Mr. Levy reckoned, inventory buildup averaged only about half the postwar rate, which normally has been about 1 percent of gross national product.

During the recession itself, inventory liquidation ran at a much higher rate than normal during the first quarter of 1991 and about average during the second, which may have persuaded theorists who spied a potential inventory rebound.

But Mr. Levy warned that 80 percent of the stocks were dumped by automobile producers – and of all industries, the automakers have learned the virtues of just-in-time delivery and are certain not to rush into an inventory buildup.

“Economists have it backward,” Mr. Levy said. “They think that when inventories are high, business automatically drops down, and when they are low, business automatically builds up. That’s wrong. Inventories forecast demand, and they are an excellent barometer. (…)

Long story short: without a recovery in employment and without a strong and fundamental reason for recovery, rebuilding inventories do not always prognosticate economy recovery. Germany is heavily dependent on exports and with the global recession this inventory rebuilding has mainly been the fruit of internal consumption.  We are probably having another case of pink shoots…

NB: For those who don’t know the expression from the chat: I use “pink” instead of “green” shoots for all those commentators who appear to see “green shoots” everywhere, at the point that you wonder if they haven’t been seeing pink elephants as well…

Recent Posts:

• Taxpayers to the Rescue of Afghanistan Banking Crisis?
• Economic Data and Earnings Schedule for September 2 2010
• Christina Romer Makes a Final Recommendation Before Leaving To Teach Keynesian Economics
• Homebuilder Hovnanian (HOV) Reports Dismal Quarter
• Auto Sales Data for August 2010
• Stock Market Rewind – September 1, 2010