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Economy in Brief

Total PMIs Back Off in July
by Robert Brusca  August 5, 2015

Spain is the exception in July with a total PMI rising. But among the four largest EMU economies, as well as for the EMU itself, the consolidated PMI readings in July took a step back. Among the manufacturing and services sectors of the three largest economies, the best that any sector did was in Germany where the services sector as unchanged between June and July. Momentum is still largely lacking in the EMU and among its largest member countries.

While some firms have an upbeat assessment for the remainder of 2015, the National Institute of Economic and Social Research (NIESR) in the U.K. has cut its projections for world growth in 2015. Previously we had seen growth estimates by the IMF and the World Bank cut back. But this is a very recent forecast from a prestigious independent research organization. NIESR is concerned about Greece as well as other things. Certainly the latest Greek claim to want a full bailout deal and not just a bridge plan is indicative of Greece making another arbitrary deadline and turning up the heat. Greece apparently wants a full deal, but it has refused to give into any more of the EU-Troika demands- a curious arrangement. Of course, the IMF has said it will not participate unless Greek debt is at a sustainable level- requiring debt forgiveness that Germany has refused. Despite some cheery press reports of progress, it seems to me that there are a number of big problems lurking here that are being swept into an increasingly large lump under the rug. Greece's demand for a full deal only make these other aspects more glaring problems.

Apart from that festering issue we have little momentum in the EMU and still very moderate economic readings. The EMU itself posts a 73rd queue percentile standing of its PMI barometer in a data set going back to 2000. Germany's 53.7 overall reading leaves it with a puny 47th queue percentile standing below its historic median. France, with a weaker headline reading than Germany, has nonetheless a higher queue standing in its 65th percentile. That is a testament to how weak the French economy has been rather than a good report on how France is doing. Likewise, Italy, with essentially the same headline PMI as Germany, has an 84th percentile standing, noting that Italy is doing quite well compared to its own recent history. Spain has both a large current headline reading at 58.3 and high queue percentile standing in its 95th percentile. While still beset with high unemployment, Spain is making real progress. The U.K. is the lone non-EMU member in the table and it has a relatively high total PMI standing, but it has a very moderate historic standing in its 58th percentile. The U.K. economy has been used to doing well.

The overall EMU reading shows sequentially stronger total PMI readings, but the gains are weak. France, Italy and Spain also show sequential improvement, but little of the gain occurs between the three-month and six-month gauges. The U.K. and Germany show a step back in in their respective three-month gauges compared to their respective six-month gauges.

In my view, there should be more concern about momentum that there is. Oil prices have destabilized and that is hurting prosecution sectors without showing up clearly as extra spending by consumers. U.S. Consumer confidence gauges were set back sharply in July. The dollar is again rising strongly on new declarations by a centrist Fed member that the economy is no longer an impediment to hiking rates. But inflation is not on the Fed's chosen path either. Still, the world economy seems braced for some bad event should the Fed start to hike rates an intentional organizations urge the Fed to stand pat.

I doubt that the Fed rate hike will trigger round of rates hikes elsewhere. The global economy is too weak and only the Bank of England seems to come close to sharing the Fed's angst over rate hikes. But there is still an unsettled feeling over the global economy. Growth does not seem assured anywhere and despite some strong catch-up job growth in the U.S. wages take on no momentum what-so-ever. It's gotten so that the Fed is reported to be disappointed with wage growth- a statement I can't ever recall being made. The risks are still on the side of weakness NIESR has it right.

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