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Economy in Brief

Clear Picture of Internal/External Order Trends…Muddies the Future of the Zone and Zonal Policies
by Robert Brusca November 28, 2011

Orders in EMU plunged by 6.4% in September after a gain of 1.4% in August. Domestic MFG orders in the Zone fell by 7.9%. Foreign MFG orders fell by 3.7%. Despite the larger fall in domestic orders in Sep. over three-months foreign orders are weaker. Over six months foreign and domestic e-zone orders are about equally weak at a rate of -9%. Year-over year domestic orders are off by just 0.3% and foreign orders are still rising at a nearly 4% pace but compared to just one month ago the domestic trend is strikingly weaker over 12-months. This is the fourth fall in orders in Sept in the past five years. In 2009 when orders did not fall in Sept they fell in Oct. Some of this weakness may be of a seasonal nature that for some reason is not picked up by the seasonal adjustment factors. Still the drop this month is huge.

There is clear weakness here, and elsewhere.

Euro Area Flash PMIs - The FLASH PMI readings for the Zone also were released today and they show continued contraction in services and in MFG. The MFG contraction got worse in November and the services sector continued to contact but its reading showed somewhat less downward pressure than in October.

Still, if we rank the standing of these two PMIs in their historic queue we find both are in the bottom ten percentile. That is each is worse than its current level only about 10% of the time.

The MFG reading stands at the 47th percentile between its highest and lowest readings while the Services sector stands at the 37th percentile of its high-low range.

These are damaging results. With weakness in orders and the ongoing slippage in the Services and MFG sectors, Europe is clearly in trouble.

It spreads- The spreading of the Euro trouble to Germany with its inability to get the auction participation it sought is another black mark on the Zone.

There is talk about eurobonds…'eurobond' is an expression I hate when used in this context. This term has traditionally meant something else (bonds issued in the Euro-market outside their native national domicile) so I will call these ‘EMU-bonds’. There is a big fight over what they might be and how they might work. Germany wants to amend the EMU treaty if such a vehicle is used to spell out what it all entails. But events may now be overtaking the German position. The IMF has offered up a new facility to try and help counties that get drawn into financing difficulties, but this is no panacea for Europe and its huge borrowers. Borrowing conditions in Germany itself are in flux. The pressure is on.

There is also talk about borrowing against gold-collateralized borrowing. That could do the trick and if gold were pressed into service it would be a very serious step.

What we see as this end game comes around is that Angela Merkel wants any new steps to be ratified in a treaty framework. I believe there are two reasons for this. The first, is to firmly establish the legality and the mechanisms. The second is to be sure that before such a step is taken the various nations in EMU have one last chance to decide if they really want to be in a union that will be financially commanded by Germany. By now the sort of sacrifice that will be required has been made clear to everyone. This is, I believe, the real reason to have a treaty ratification. It is believed that the UK could not pass one again and its participation even though it is just in EU might fail the test of a vote. For other nations the Germans want a clear statement on their willingness to change and to reject their past ways by adopting new rules and constraints in return for more stable funding. I see this as a tactic and as a very important strategy. This new move to link fiscal policies by issuing an EMU-bond for which all community members would be responsible would come with some real constraints and losses of sovereignty. This would be a step up in the European integration trend. Not all current members might be up for it. But the alternative would then be clear. Events seem to be pushing Europe fast toward some greater solution, a day of decision.

FLASH Readings
Markit PMIs for the Euro Area MFG Services
Nov-11 46.38 47.83
Oct-11 47.09 46.40
Sep-11 48.51 48.84
Aug-11 48.99 51.48
Segment averages    
 3-Mo 48.20 48.04
6-Mo 50.27 50.22
12-Mo 53.82 53.05
159-Mo Range    
High 60.47 62.36
Low 33.55 39.24
% Range 47.7% 37.2%
range: 26.92 23.12
AVERAGE 51.49 53.61
Queue % 10.1% 9.4%

At the same time the economy seems to be imposing new constraints and risks, itself. The slowing in the EMU as evident in the PMIs and in orders is becoming more like the kind of weakness economies see with the onset of recession. Recession will make any Euro-deals that have been made, up to this point, harder to keep. On balance as we get set for Thanksgiving here in the US –and even as we wallow in our own significant political problems- we can be thankful that we are not in Europe.

For this American holiday Europeans need to give thanks a little a less and make choices a little more; they can pray that that they make the right choices so that they will have something for which to be thankful next year.

Selected Euro Area Industrial Orders
SAAR
ex m/m
Mo/Mo Aug
11
Jul
11
Aug
11
Jul
11
Aug
11
Jul
11
Euro Area Aug
11
Jul
11
Jun
11
3
Mo
3
Mo
6
mo
6
mo
12
mo
12
mo
 MFG Orders 1.9% -1.6% -0.7% -1.5% 4.6% 6.3% 5.1% 6.7% 9.4%
 MFG Sales 1.5% 2.1% -2.0% 6.4% -0.3% 4.5% 4.2% 10.2% 9.9%
  Consumer 1.5% 0.4% -0.5% 6.2% -4.1% 6.1% 4.8% 5.3% 4.1%
  Capital 2.7% 3.6% -2.3% 16.4% 8.5% 8.6% 5.4% 12.2% 11.0%
  Intermediate 2.5% 2.5% -7.4% -10.4% 9.6% 6.8% 2.9% 8.7% 10.3%
Memo:MFG                
Total Orders 1.9% -1.6% -0.7% -1.5% 4.6% 6.3% 5.1% 6.7% 9.4%
 E-13 Domestic
MFG orders
2.5% 2.5% -7.4% -10.4% 9.6% 6.8% 2.9% 8.7% 10.3%
 E-13 Foreign
MFG orders
-0.1% -4.5% 2.5% -8.1% -2.7% -3.5% 0.4% 3.5% 8.8%
Countries: Aug
11
Jul
11
Jun
11
3
Mo
3
Mo
6
mo
6
mo
12
mo
12
mo
 Germany -1.2% -2.9% 1.4% -10.5% 1.3% -1.8% 6.0% 5.7% 11.1%
 France: 2.8% -9.3% 11.7% 17.7% 15.8% 7.6% 5.2% 11.2% 8.1%
  Italy: 5.0% 1.8% -4.3% 9.8% 5.9% 16.7% 9.6% 10.2% 10.3%
 Spain: 2.0% 1.1% -4.3% -5.2% -2.9% -1.8% -5.6% 4.5% 5.4%
Compare:
US Factory Ord
-0.2% 2.1% -0.4% 6.1% 9.5% 10.2% 10.0% 14.1% 13.6%
Some Euro Area reports are timely and some lag. This table allows a sequential inspection of trends regardless of topicality
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