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Economy in Brief

EMU PMIs Wither in March; Mixed Bag Elsewhere
by Robert Brusca  March 24, 2022

PMIs in Europe are weakened on balance in March. The Composite Index for the EMU fell in March, driven lower by weaker conditions in manufacturing and in services. Germany had weaker conditions in March driven lower by weaker conditions in manufacturing and in services. France breaks the model of the EMU member with a stronger index overall boosted by strengthened services as the manufacturing was weaker on the month. The U.K. was weaker overall despite having a stronger service sector; its weakness was created by a weaker manufacturing sector. Japan saw strengthening across the board for its composite, manufacturing, and services as did the U.S. The U.K. has the strongest composite standing on the month, but the U.S. has the most uniform strong stands across sectors- the best balance. Japan is the weakest.

Sequential changes in lagged averages
Looking at the sequential changes over 12 months over six months and over three months (calculated on one-month lagged averages that ignore preliminary data), those averages show that over 12 months all the indicators are stronger than they were twelve months ago. This applies to the composite, the indexes for manufacturing and services in each of the survey respondents. Over six months compared to 12 months, conditions are somewhat uneven. Japan shows strength across the board: for manufacturing, services and the composite. However, the U.K., Germany and the EMU show weaker conditions across the board. France shows mixed performance over six months as does the U.S. Over three months compared to six months, weakness prevails. However, manufacturing is stronger compared to six months in Japan, the U.K., France, and Germany. But manufacturing still weakens over three months compared to six months for the European Monetary Union as a whole- all EMU PMIs weaker over three months. The U.S. also shows a weaker composite and weaker components over three months on average data.

Queue standings compared
The queue standings show the positioning of the composite indexes on data back to 2018. Readings are mostly upper mid-stream. There's a 72.5 percentile standing in the EMU, for Germany it's a 66.7 percentile standing, France is a bit stronger at the 78.4 percentile mark, the U.K. at 88.2 percentile. Japan, however, is weak with a 41.2 percentile composite. The U.S. composite stands at 82.4%. Manufacturing sector standings are all in the 60th to low 70th percentile except Japan at 82.4% and the U.S. at 80.4%. Services sector standings are firm-to-strong with the EMU clocking 72.5%, Germany at 68.6%, France has a stronger 84.3%, the U.K. has an even stronger 94.1%. Japan’s service sector is below its median at a 41.2 percentile. The U.S. logs an 86.3 percentile standing.

A narrow range houses most estimates
Despite considerable country differences, the average composite reading for EMU members and Japan is 69.4%, the average manufacturing rating is 70.6%, and the average services reading is 72.2%. These standings are all clustered in the upper midrange (low 70th percentile for the most part) indicating overall firm conditions. However, as the table shows there are some clear differences among members. And in comparison, all the U.S. ranks are in their 80th percentile.

Month-to-month and three-month patterns for unaveraged PMI diffusion indexes
The month-to-month changes are concentrated with declines in Europe, and some rebound in the U.S. and Japan. Still, Japan tends to lag the PMI levels achieved in Europe (except for manufacturing). Over three months, composite conditions improve everywhere except Japan. All show a weaker manufacturing sector except France that is unchanged and the U.S. that shows an increase. The service sector advances everywhere over three months except in Japan.

Japan is the weakest
On theses timelines, only Japan post PMI readings below 50. Its composite PMI for March is 49.3, and its service sector PMI is 48.7. Japan’s composite and service sector PMIs are below 50 in March, February and January, showing outright declines in activity for these sectors in each month. In addition, Japan’s composite PMI averages a below 50 PMI reading over three months and 12 months while services show and average reading below 50 on all horizons, three-months, six-months, and 12-months. Still, Japan’s manufacturing sector registers steady expansion. Japan is suffering from the ills in China, its largest trading partner, where growth has slowed and where a zero-Covid policy continues to impede economic activity. The virus has also been an ongoing issue in Japan that has impacted services.

Summing up
There is no stark change in any of the composite readings as the war commenced in Ukraine. However, there are indications of growing issues as shortage in Spain and protest to rising petrol costs attest. At the same time, there is also a new variant of the virus circulating in Europe that has begun to push up virus infections. It is active in the U.S. as well, but so far, with less impact. Looking ahead, the war in Ukraine, the Russian sanctions, and the rising infection rates across Europe, all are likely to begin to take a toll on activity. There already is a slightly declining tone across European PMI readings and weakness in Japan. With central banks raising interest rates, these trends are going to be important to watch. We hear many commentators tell us how strong the economy is and how it can stand up to strong interest rate hikes; there are calls for either strong or ongoing rate hikes in the U.S. Yet, the economic trends depicted by the PMIs do not endorse these pronouncements – except in the U.S. where PMI value have firmed for two months in a row and where PMI standings are in their 80th percentiles.

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