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Economy in Brief

PMIs Bend lower in EMU on Covid-19 Actions; Service Sector Has Been Hammered; Manufacturing Is Blunted
by Robert Brusca  November 23, 2020

The European/U.S. Divide
It can be lost on no one that economies in Europe, the U.K., and even Japan are being beaten back by the Covid-19 virus and actions to contain it, while the U.S. seems to skate by unscathed. Ranked against the PMI values of last five years, the EMU composite is at a 5.1 percentile standing, the U.K. at a 5.1 percentile standing, Japan at a 13.6 percentile standing and the U.S. at a 98.3 percentile standing which marks it as the strongest value on this timeline for the U.S.

The role of the virus
Yet, the virus is swirling in Europe. It has struck the U.K. hard. It has been at a lower intensity in Japan, but there substantial actions have been taken based on risk and fear of spreading amid its high population density. In the U.S. health officials are issuing all but the most apoplectic directives for people to wear masks and stay home. This week is a major U.S. holiday, Thanksgiving. Colleges usually have some sort of break in the U.S. permitting students a trip home for the holiday. But this year the CDC advises that no one go to a gathering with people – even close relatives- unless they have been living in the same house together. Many Americans are abiding by the advisory…and many are not. Many college students are headed home without knowing if they are bringing with them something more than holiday cheer. So, while the U.S. economy is outdistancing Europe, that is not because the virus has passed it by. The U.S. may still have a virus day of reckoning ahead of it. For now the U.S. economy is performing while Europe is not.

The EMU composite PMI has fallen to 45.1 (flash) in November from 50.0 (finalized) in October. The manufacturing component is a bit more than one point lower while the service sector reading is lighter by more than five points, a sizeable drop in one month. The chart shows that the service sector has been losing momentum at a rapid pace, not just this month. And it has been below the boom-bust line of 50 in seven of the last nine months, as well as for three months in a row. Manufacturing, on the other hand, has only been above the neutral value of '50' in five of the last 22 months but it has been above '50' in each of the past five months showing a clear cut recovery from past Covid-19 issues and trade dislocations. Manufacturing has increased month-to-month in five of the last six months. It is now showing signs of losing that upward momentum. Services and manufacturing clearly show different tendencies and it is the service sector that is being hammered the worst by Covid-19 since many businesses in that sector depend on personal contact and exchanges.

In the EMU, the manufacturing sector has a 57.6 percentile standing, above its median (medians on all PMI rankings are at 50%). German manufacturing is at a 72.9 percentile standing France's manufacturing sector has been beaten down to a 15.3 percentile standing. U.K. manufacturing still has a 79.7 percentile standing while dealing with Covid-19 issues as well as Brexit concerns. Japan's manufacturing sector has an 18.6 percentile standing. In marked contrast, all U.S. sectors are on their highest levels for this same period.

Diversity within globalism
This a very unusual time with economies still rather tightly linked globally and a pandemic also engaged in a global sweep. The pandemic is having differential impacts across countries as authorities respond in slightly different ways and do face slightly different circumstances as regards the functioning of their economies, their economic structures, their population densities and a host of other factors. While it has been a time for rampant and sometime thoughtless challenges and recriminations, one thing that is clear is that some countries have been hit harder and some less-so and it is hard to explain why that is so in many cases. The virus spreads when people are careful and when they are not careful. Although large public gatherings have been frequently to blame for the spread of virus, in the U.S. the recent spread has been blamed more on more intimate modest-sized gatherings in peoples' home leading to the CDC recommendation not to go home for the holidays. It is a dictate that some think is almost anti-American.

Covid-19 'supersaturation'
Germany has had protests against its strictures. In Berlin, crowds were dispersed earlier this month using water cannon. There is something called Covid exhaustion as people are getting tired of mask wearing and social distancing and economic closures. Italy has also had a lot of protests over shop closings. Because the U.S. has been through a rough and tumble political campaign, the accusations of social malpractice have flown fast and furious – more rapidly than the facts could ascertain… in fact.

Vaccines to the rescue?
A number of vaccines have now gotten to mature stages in their vetting so that some can now apply for emergency usage in the USA. That request means that the drug-maker is applying to get the drug into circulation ahead of what would normally be a longer, slower, process of vetting and comparing the test results already in hand. Because there is a pressing need, it is expected that these vaccines will go into early use and in all likelihood Europe will be doing the same.

Still a long wait for vaccines to solve economic problems
Vaccines may be an 'ultimate panacea' but they are not an immediate panacea since there are only so many doses available to start and because some of the vaccines require two separate applications to become fully effective. One of them has a very stringent requirement for handling based on its need for intense refrigeration. As these manufacturing and logistical challenges are met, authorities will decided how to distribute the vaccine as well as to decide who gets it first. In the U.S., a medical commission will set recommendations then ship vaccines to the States who will actually make the choices and effect distribution. However, as complicated all that is, it is still not that 'simple.' There is also is push back against a vaccine as many people are wary of taking a new vaccine. According to an article in Scientific American, a highly respected journal, fewer than 50% of Americans would commit to taking a vaccine when one becomes available (Source here). Eastern Europe is said to be a region of high vaccine skepticism as well (General European vaccine skepticism--here and here). Another survey indicates 3 of 4 people worldwide would take a covid-19 vaccine if one became available (here).

Covid-19 will remain a key factor for the year ahead
All of this simply is another way to underscore the point that in the immediate future we will continue to grapple with the virus as vaccines will only ease their way forward over time; it may be by the middle of 2021 or third quarter and probably later before they are able to turn the tide, depending on the country (despite the G20 pledge to see that the vaccine needs of less wealthy countries are met).

For the time-being, the virus is in another spreading wave. We have discovered no way to stop it and can only slow it by impeding economic activity which the data make clear. But we may also be on the verge of changing that as viable vaccines emerge, assuming that no issues crop up in the dispensing of them for emergency usage.

The need for bridge policies
At the same time, there are mitigation policies at work and there are politics at work. In a number of countries, people already are restive about restrictions on their actions whether justifiable or not. In the U.S., a set of Administration-Federal Reserve joint programs to backstop lending in markets has been terminated as the U.S. Treasury has demanded that the Fed return funds used in those programs. With the disappearance of these backstops, there will be more risk. Even though those monies were not actively employed, they still served a purpose. If we begin to see marked increase in lending spreads and private lending reduced as a result of the removal of the backstops, those would be bad events. U.S. political parties are apparently content to play their game of obstructing one another and it seems that each round they play the stakes get higher and higher and the impact on the economy worse. We can only hope that this is not the start of another such round of obstructivism.

Commentaries are the opinions of the author and do not reflect the views of Haver Analytics.

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