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Economy in Brief

EMU PMIs Get a Leg Up on Growth As the Service Sector Sparkles
by Robert Brusca  July 24, 2020

The PMI data for selected Europe and the U.S. join the already released PMI data for Japan in July. Results in July exceed expectations. EMU, German, French and U.K. composite PMIs all tipped over the 50 mark, indicating private sector expansion while the U.S. metric came in at 50 on the button – a dead neutral reading. Japan’s PMI, with already released results, stay below the 50 mark for its composite at 43.9.

The composite score not only has risen above 50 for most in the table indicating expansion after what has been a four-month drought for growth for most, but it also has produced readings that are strong by the standards of the past four and one-half years.

The EMU composite has a 68.5 queue percentile standing, Germany has a 74.1 queue standing, France has a 90.7 queue standing, and the U.K. has a 98.1 queue standing. The U.S. and Japan fit much farther down the scale with composite queue standings in the lower 10 percentile of their respective queues of data over the past four and half years.

Caveat PMI
However, I caution on interpretation of these results. The diffusion gauges measure THE BREADTH of month–to-month changes. And on that basis, there is substantial widespread growth in manufacturing and services in Europe. But conditions are not strong. In vetting the consumer confidence results yesterday, we ranked confidence by its changes as well on the levels of its indexes. Although Germany had a huge strong rank based on change, it also had a weak-below median reading based on the level of its consumer climate reading by GfK. Diffusion is only a relative measure and so we have to be careful in how we apply it to ordinary real-world data. There was a sharp drop in the European PMIs. This is now a nice relatively broad rebound, but the EMU gauge was some 37 points below neutral at its worst and now it is less than five points above neutral. While that may stand as its best showing since June of 2018, the pattern of PMI increase by no means implies that overall output and growth has come that far back in general. That sense of rebound is only true of the simple month-to-month-change which is impressive but still has a long way to go to make up for what has been lost over a series of months.

Still, there is messaging in the PMI results. And that messaging shows the rebound is led by the service sector which means that Europe is getting back to business more like normal. What is driving the improvement in progress in containing the virus. The virus hits the service sectors the hardest since so much of that activity is face-to-face and of the virus-spreading friendly sort of activity that gets shut down when virus fighting gets going. The EMU services reading has a 79.6 percentile standing compared to a still weak 35.2 queue percentile standing for manufacturing. Germany, and to a lesser extent the U.K. and France have similar splits. The U.K. and France have a much stronger service sectors and with manufacturing showing an above median queue standing (above the 50% queue mark) unlike Germany and the EMU.

In contrast to Europe, Japan has similar weakness in manufacturing and service queue standings and in the U.S. the manufacturing’s standing is the stronger one at its 24.1 percentile compared to the 9.3 percentile for services. That configuration basically tells you what you need to know about progress vs. the virus. In the U.S. and Japan, progress is lagging. The U.S. is being led to higher ground by manufacturing which will not play well since manufacturing is not the job creating sector that the service sector is.

The PMI data on the month are impressive and better than expected. As always, the prospects for improvement will depend on the virus and how well behaved it is. The U.S. is struggling with some virus revival and at the same time some of its stimulus programs are running out and apparently are about to be renewed in some fashion. We will find out more over the next week. Meanwhile, the EU has just gotten a support deal that now must be vetted through the various parliaments.

These are support deals for sustenance more than for stimulus. The shutting down of a major modern economy is a hard thing to make up for. If people thought ahead of time, it was within the government’s grasp to compensate for a lockdown they now know different. Jobs, lives, health and, in the US, health care coverage, all are being lost. Personal finances are being put in ruin. The national debt is piling up. Some monies are going to people that do not need it. Some who need support are not getting it at all. And it is no longer your skill or hard-working nature that is responsible for how you are remunerated. It is fate, a fickle four-letter word. And for some time yet that will continue to be a fait accompli.

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