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Economy in Brief

EMU PMIs Remain Weak; Heck…Nearly Everything Remains Weak!
by Robert Brusca  June 5, 2019

The EMU shows both manufacturing and services weakening more or less progressively. Over three months there is minor improvement in the services PMI compared to six months, but the PMI rankings in the EMU place the headline PMI as this weak or weaker only 7.5% of the time, only 1.9% of the time for manufacturing, and only 18.9% of the time for services.

The raw diffusion score shows that manufacturing right now is generally weaker than services. That is true in each raw score instance in the table. And that is not surprising because the five-year average for services is higher than for manufacturing among these members everywhere except in Italy where manufacturing has fared better. The services sector is dominated by trend and generally has less volatility than manufacturing. Only Spain and France show more volatility in their respective services sectors than in their manufacturing sectors over the last five years- and that difference is small and not statistically significant.

Still, it is the ranking of these sectors that really stands out: the rankings are low; a few are moderate and only one high on a technicality. A low two percentile standing for manufacturing prevails in the EMU, a 15.1 percentile in Japan, a relatively high (near neutral) 50.9 percentile standing in China, and a 21st percentile standing occurs in the United States. Services standings are higher as we noted with Germany's 83rd percentile standing, the outlier and reflecting more on past economic weakness in the German services sector than on current strength. For example, the raw U.S. services diffusion reading is higher than the German raw reading; yet, the U.S. services sector has a queue standing in its 43rd percentile, nearly half the percentile standing of Germany.

I 'pair' the EMU and select other data in the table this month with the graphs on global sector diffusion indexes. That chart shows ongoing weakness as well as deterioration in both manufacturing and services. The EMU data hint at a hiatus in weakness with a very minor bounce in the composite index on the back of services. Still, Germany, France and Spain show 3-month compared to six-month erosion in manufacturing, but only Spain shows minor service sector erosion for three-months compared to six-months. Japan shows erosion, China shows a bounce and the U.S. shows erosion in both sectors.

Globally a lot depend on the U.S. for policy as well as performance
It is hard to paint a very optimistic picture here. Trade war and trade talk continue. Markets are unsettled. The U.S. ADP showed a sharp slowing in job growth, the sharpest decline and the weakest growth since 2010. But the U.S. nonmanufacturing ISM revived on the month and even produced a contrary-to-ADP strong job reading. U.S. data are unclear but have become erratic- never a good sign and often a signal of a coming economic transition.

The global situation is still weak and the IMF has just trimmed China's outlook on trade risks. Central banks are already on a stimulative path. The central bank that has the most firepower for easing (the Fed) has its own members railing against markets trying to hijack policy. How sad. Central bankers need to look at markets to gain insight about what is going on. Markets do not bully central banks. Markets do not speak and challenge the Fed, the ECB or the BOJ. Markets are existential. They are. They exist. They speak by what they do. They are not duplicitous. They may be schizophrenic from time to time, but they are true to the forces that play out through them. Markets have futures and forward-looking prices that enable transactions today based on a view of tomorrow. But there is no forward guidance. Markets never tell the Fed, the ECB or the BOJ that they are wrong; however, central bankers, particularly the Fed, have taken that stance with markets (the Fed's Stanley Fischer in early 2016 is an example: FYI, Stanley was wrong). Now Fed vice Chair Richard Clarida is railing against a market that he says it's trying to hijack policy. That should give some perspective about central banks and how cloistered or ethnocentric they are. Outside opinions are NOT welcome. They have their own people, their own models, and they depend on them almost to the exclusion of other things. Central banks do not want to be cajoled into doing things by weak markets or inverted yield curves since that would take power from the central banks. So central bankers usually ignore important market signals until it is too late and their own old, creaky, lagging, time-tested, too-slow, indicators tell them what they should have done months ago. For example, the Fed should NOT have hiked rates in December. But it did. That act is putting global conditions in a pressure cooker. If you are waiting for central banks to act, you have placed a losing bet on the wrong horse in this race. Meanwhile, market and economic conditions will continue to deteriorate.

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