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Economy in Brief

EMU: PMIs Continue to Drop- Is Recovery Past Its Peak Pace?
by Robert Brusca  May 23, 2018

The chart of the PMI values is very telling and disturbing. With this month’s drop, the tail off in the PMIs is quite clear and the run up now looks like it was a flash-in-the-pan. Manufacturing’s PMI certainly ran up to a peak and turned around and then ran off equally as fast.

The percentile queue standings (Q-standings) of these indicators have now come full circle from quite strong readings to middling and weak readings. The percentile-of-range metrics place the various PMI readings in a moderate-to-weak position. These readings, which are in the second from the right column in the table, position the month’s raw PMI score between its high and low readings over the last 5-plus years; it is a percentile of range statistic and, as such, less robust than the Q-percentile standings.

The overall PMI slips in May for the EMU, Germany, and France. There are PMI step-downs month-to-month for manufacturing and for services in the EMU, Germany, and France, with the lone exception being that French manufacturing improved month-to-month. Again with only France as an exception with its manufacturing sector, all manufacturing, services as well as the headlines are in May below their averages for the previous three months. There is NOT a steady progression lower in the moving averages from 12-month to six-month to three-month as the six-month reading is generally higher than the 12-month reading, but in all cases the three-month PMI reading (sector or headline) is below the 12-month reading. So the six-month reading that still has much of the peaking represented in it is not a counterweight to the ongoing drop in the PMI trends; it just needs time to play out. The chart reminds us that the drop is not a temporary drop but an observation about what appears to be an evolving path lower. The terminal value is not yet able to be determined.

The raw diffusion reading headline PMIs ranks France>EMU>Germany. However, the 12-month averages for manufacturing rank Germany>EMU>France. This demonstrates that the near-term French readings are relatively strong but that France has been relatively weak over the past 12 months as well. Both of these effects play out when we look at the Q-standings.

The queue standings (which rank each headline and sector observation in its own 5-plus year queue of data) rank France>EMU>Germany. And the rankings are not close. The French headline is over 10 ranking points above the EMU. And the EMU at a queue ranking that is quite moderate at the 58.5 Q-percentile is well above Germany with a single digit and lower 9 (yes, NINE) Q-percentile standing. Germany’s services sector that has been lagging all through their ‘recovery’ is extremely weak with a raw diffusion score of only 52.1 in May with a 3.8 Q-percentile standing itself.

Manufacturing and services Q-rankings all have the same progression: France>EMU>Germany. But the manufacturing rankings have a relatively tight (range of: 81.1% to 69.8%) while the service sector rankings are disparate (range of: 81.1% to 3.8%).

German policy response: fiddle dee dee!
What is fascinating is that even with the weak service sector readings, Germany is on a mission from God to run a budget surplus and to further restrain its own growth through the budget multiplier process. Germany is so determined to do this, that it plans to stiff the U.S. and other NATO allies by not meeting its agree 2% of GDP spending on military that the U.S. has been urging Germany to finally meet. Apparently, the U.S. is now providing ALL OF the German defense and will do it FOR FREE. And Germany is also, of course, ignoring the weakness in its own economy. Those pesky Germans sure know how to make macroeconomic policy, don’t they? It’s just a matter of setting priorities and sticking to it: (1) inflation, (2) inflation, (3) inflation! Since German inflation has been running relatively hot (still below the EMU objectives, however), Germany is now going to take steps that will cool that off at a time that EMU inflation is generally lower in other countries. Germany, it seems, does not want to lose its competiveness edge to other EMU members and will squeeze an already underperforming economy to make sure that it keeps its competitiveness leadership, sacrificing domestic infrastructure spending as well national defense. It’s all a matter or setting priorities and mooching off your allies.

The U.S. echoes the EMU trend as its services sector ranks below its manufacturing sector in May on a Q-standing basis. But both U.S. manufacturing and services improve month-to-month unlike the EMU where both sectors are generally slipping. The U.S. also breaks with Europe as its three-month PMI averages by sector both are rising relative to its 12-month average. Japan reports a flash manufacturing reading that steps lower by more than point month-to-month and has the lowest Q-ranking in the table. That means it has the weakest manufacturing sector relative to its past five-plus year performance.

Summing up
On balance, there is a loss of momentum in the EMU. Manufacturing is still operating at a solid-to-strong pace in the EMU as well as in Germany and France. But there is a huge difference in how services sectors are performing. Services are everywhere the job producing sector. The weakness in services is not something to treat lightly or to ignore. Of course, we get many more readings on manufacturing than we get on services each month. So it is easy to let a weak services sector become underrepresented in analysis. But do not let this service sector weakness go by unnoticed. It is having an outsized negative impact on the headline PMIs and on the economy at large.

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