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Economy in Brief

MFG PMIs Continue to Show Softer Blow to EMU Region...As EMU Becomes A Matter of Faith
by Robert Brusca  February 1, 2012

The EMU PMI rose by the better part of two points in January marking its second straight advance even though it continues to show overall industrial contraction for the sixth month in a row.

Germany’s index is now showing a sector increase after showing just three-months in which its own MFG PMI index was below 50(break-even). Austria is back above 50 after four months below breakeven.

Of the eight EMU nations reporting values here we have readings on only two above breakeven as well for the UK, an EU member not an EMU member. The UK has had a more variable industry reading which was below breakeven for three-months in a row then above it for one and previously below for two months. Even so if we look at the standing of the PMI gauges in their respective arrays of historic data (historic queues) back to March 2000 we find that the current UK reading stands the strongest in the 65th percentile of its historic queue Austria is next in its 43rd percentile followed by Germany in its 40th percentile. Not surprisingly Greece is the relative weakest, in the bottom 5 percentile of its historic queue (worse than this only 5% of the time). The percent-of-range reading tells us that the Greek MFG reading at its worst is only 13% lower in its range than its current reading. Most country percentile-of-range readings are no weaker than the 45th percentile (France). Some, like Germany, Austria, Ireland and the UK, are still as high as in their 60th-something percentiles.

The difference between the percentile standing and the queue standing is illuminating. The queue standing tells us how often the current reading is lower than it is now (but not by how much). The percentile standing tells us the percentile standing of the current observation in its high/low range (how much higher or lower it can become). Obviously in recessions we tend to get very low readings so that percentile trends in the 45th range percentile do sound weak enough to be recession readings. And queue standings below 20% tell of severe weakness (only weaker 20% of the time) but since recessions do not occur 20% of the time these are not recession diagnostics until they start to plummet to the bottom 7% of queue or so.

In that way range and queue readings work together to give us a more precise profile of where the EMU nations really stand. They are troubled and weaker but largely not yet in recession at least according to MFG metrics – except for Greece, of course). Some of these nations have posted a negative GDP number but in general no large EMU/EU country has posted a large negative quarterly GDP result. The monthly indicators have since ‘largely’ stopped eroding or have begun to show a slower pace of erosion. Most of the stronger countries – even Italy - show this result for their MFG metric (but not for all metrics). We can conclude that despite the panoply of problems in the Euro-Area facing policymakers, facing individual countries, facing banks, and embroiling the ECB, there has been something that has arrested what had been a very steady unwinding in the Zone and in its momentum.

Still, readings for Greece, Ireland and France fell in January. For the rest of the individual cases the country metrics improved. The overall EMU reading has improved for each of the last two months.

But, on balance, the Zone remains ‘in trouble’ with more pending questions than pending answers. In Davos a straw-vote found most attendees still think that the Zone will endure its latest troubles (but went no further than that to prognosticate). And if you are an economist looking for evidence that the systemic EMU entity is on solid sustainable footing you are not yet satisfied either. Indeed, the matter of a new treaty or making amendments to the old one continues to be a sticking point for some members. Clearly EMU and ‘the euro’ have become ‘a religion’. They are a religion because people have clear cut beliefs for which there is no proof. EMU’s existence and persistence has become a matter of faith. Or maybe it is simply existential? I think therefore I am. I think I am European therefor I am optimistic on EMU and euro. Is that it? More to the point,is that enough?

Markit MFG Indices
3Mo 6Mo 12Mo %ile Queue %
EMU 48.78 46.94 46.37 47.36 47.78 51.52 56.6% 24.5%
Germany 51.02 48.44 47.89 49.12 49.62 53.97 61.9% 40.6%
France 48.45 48.85 47.33 48.21 48.40 51.41 45.4% 19.6%
Italy 46.78 44.27 44.04 45.03 45.62 49.78 48.1% 14.7%
Spain 45.09 43.68 43.77 44.18 44.26 46.75 57.2% 14.0%
Austria 51.75 48.96 47.57 49.43 49.19 52.84 64.7% 43.4%
Greece 40.97 42.03 40.91 41.30 41.82 43.42 13.2% 4.9%
Ireland 48.26 48.60 48.54 48.47 48.75 50.89 64.2% 23.8%
Netherlands 48.96 46.16 46.05 47.06 48.13 52.11 53.5% 28.7%
UK 52.13 49.75 47.94 49.94 49.53 51.76 66.5% 65.7%
percentile is over range since March 2000
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