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Economy in Brief

E-Zone Continues to Slip as MFG Slows Its Rate of Descent and Services Speeds Its Up
by Robert Brusca  September 5, 2012

Europe’s PMIs continue to slip. The services sector deteriorated in August but MFG actually firmed its index although still held below 50 indicating an erosion of manufacturing sector output.

Germany’s services sector took a big step lower, a month to month drop that is in the bottom 25% of all the sectors historic monthly changes. That is weak but it is not disastrous. Still, the level of the service sector index in Germany is the bottom 17.6 percentile of its historic queue. And while that is better than the 10.8 percentile for EMU as a whole, it is still quite weak. It is not on the edge of recession but it shows weakness encroaching in Germany.

Manufacturing in the Zone did not stabilize as it is still slipping (PMI below 50) the pace of slippage slowed with the MFG index rising to 45.08 from 44. Still that reading is in the bottom 10.5% of all MFG PMIs since March 2000. Germany’s MFG sector is ranked even lower relative to its own queue history in the bottom 9.8% of its historic range even though its index rebounded this month. Note that the queue standings are still much lower than the range percentile standings. This reflects the fact that at these levels there are fewer observations below the current observations but that the weakest of those observations lie a lot lower.

The UK index took a sharp rebound this month but that is only after a sharp drop the month before. Still, on balance over the last two months the UK index is net higher by about a point and closing in on neutral territory. At the 52.4th ranked percentile the UK MFG PMI is the relative strongest among this group of countries and it is the only nonmember of the single currency area in the table.

This report continues the theme of Germany extending a helping hand and being pulled into the morass instead of pulling the troubled nations out of it. The euro-Zone has to do something to stop this ongoing unravel. Maybe it will this week? This week ALL EYES and EARS are on the ECB that Thursday is supposed to explain its new strategy as circumstances surrounding the new bail-out fund should be clarified. There has been a lot of promise and back tracking on this program as Mario Draghi once promised to do everything necessary, then encountered a strong blow-back from Germany. Tomorrow’s announcement is expected to produce a viable fund. But the key elements of the ECB’s bond buying strategy are still an unknown.

Opinion Land: My problem with this EMU strategy is that there is a strategy for extending a hand farther down to help the troubled nations but no plan to pull them up and to put them on truly sustainable footing. Throwing good money after bad does not make sense. Some may view this as an operation that buys time, but to buy time you need to get yourself to place where things will be better, where wills would stiffen, where something would change. There is no evidence of that as the destination. But ‘buying time’ is what they seem to be doing. Unless you are willing to have faith the beleaguered nations that are currently suffering under recession and austerity and debt will be willing to go on like for years I see no evidence that this is the first step on the road to progress. Without a currency re-issue and a depreciation and Zone departure many of the southern European nations are simply too uncompetitive to prosper and are destined for 10- to 20- years of hard times before they will be healthy enough to pull themselves up out of this mess. It’s a commitment to such a stretch of time under austerity that I have not heard made by any troubled borrower-nation. That makes me wonder if all this effort to ‘save’ the ‘euro’ (or ‘Greece’, or ‘Spain’ or ‘Portugal’, etc.) is anything other than a BIG PR exercise and meant to get us past some key European elections before facing the music sometime later. And with each postponement in dealing with reality, the future of the break-up gets more painful and more costly.

Markit MFG Indices
  Aug-12 Jul-12 Jun-12 3Mo 6Mo 12Mo %tile Queue%
EMU 45.08 44.00 45.07 44.72 45.48 46.63 10.5%
Germany 44.66 42.98 45.04 44.23 45.41 47.46 41.3% 9.8%
France 46.03 43.41 45.20 44.88 45.48 47.01 48.6% 14.0%
Italy 43.61 44.30 44.61 44.17 44.84 45.30 37.0% 7.7%
Spain 44.05 42.29 41.08 42.47 42.90 43.55 54.3% 16.8%
Austria 46.73 47.36 50.07 48.05 49.52 49.51 47.3% 13.3%
Greece 42.09 41.85 40.13 41.36 41.53 41.20 25.1% 10.5%
Ireland 50.88 53.85 53.09 52.61 51.76 50.25 75.4% 45.5%
Netherlands 49.74 48.93 48.89 49.19 48.96 48.51 56.6% 36.4%
UK 49.52 45.22 48.54 47.76 48.55 49.23 60.3% 52.4%
percentile is over range since March 2000        
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