EMU Flash PMI Readings Disappoint

As we have been warning for several months, the bounce in the EMU PMIs for MFG and Services were not to be taken to the bank. During a period when economic activity has been dropping quickly then slows its rate of descent, it is possible for PMI-type readings to show rebounds that really only represent a slowing in the pace of decline. PMI readings are diffusion indices that are very sensitive making them hair-triggers for economic assessments that we must deal with carefully. That seems to be the revelation in the data reported today as the MFG and Services PMIs for EMU are both below 50 and registering contraction. The Service index fell from above 50 where it was for only one month and the MFG PMI rose for the third month in a row but continued to languish below 50 which is the dividing line for growth vs. contraction for this sort of index.

Not only are the index levels showing a drop but they are each weak in their respective ranks of historic data. The services reading, while numerically higher than the MFG index is actually weaker relative to its own history of data. The Services PMI stands in the 16.5th percentile of its historic queue compared to a 26.8 percentile standing for MFG.

However, in an unrelated report, EMU industrial orders for December rebounded and they mounted a rise of 1.9% in December compared to November. Over three-months industrial orders are rising again at a nearly 10% annual rate. But that is a volatile series which was falling at a 26.6% annual rate over three months just in November. Orders in EMU are still shrinking over 6-months and 12-months. MFG sales in the Zone are still falling in December. Most of the orders strength in the Zone is coming from ‘foreign’ orders as domestic industrial orders in December are up by just 0.2% in December. However of the Big Four EMU members, three are showing industrial order increases in December (all but France).

The PMI trends themselves are unclear. The MFG reading is above its three-month average value while the Services reading is slightly below its three-month average. Both averages are, of course themselves below 50 and showing contraction.

Assessing the MFG ad Service PMIs is complicated by the fact that the Services range of actual values is wider than the MFG range. The PMI folks never deal with that difference as the see each variable with an upside of 100 and a downside of zero. But in fact no PMI index ever spans its entire range and each has a different ‘effective range’ for its variability, and average characteristics as well. We think that that these things need to be accounted for to understand what the PMI values really mean.

The services sector has a higher average and a higher range midpoint than MFG on top of having a broader range. So a direct comparisons of the MFG with the Services indices leads to somewhat misleading results. The services reading can be higher as it is this month but still be lower in its ordered queue (as it is this month, as well) and lower in its high-low range (as it is this month). So while the raw reading for services is higher than for MFG it signals relatively weaker services sector than does MFG. On balance the raw readings while useful for their position relative to 50 are not useful in assessing just how weak or strong each sector might be.

Stepping away from the reports we can gain some perspective and just look at the economic and political climate. Clearly this gives us reason to pause. The after-the-fact analysis of the Greek debt deal is now beginning to deal with the clear apparent flaw in that plan. The situation has not stoppered contagion. The Greek deal, if you look at it closely, is structured more to see that banks are paid in the future that it is structured to ‘help’ Greece? Just look at the provisions… What is there to help Greece retrain people or to spur investment? Are there investment credits or monies or anything besides budget and wage cutting? Even the debt write-down is really only marking securities to market. That benefits Greece by allowing it to claim lower debt and smaller debt to GDP ratio but in truth it was a load of debt that Greece was never going to pay hence the low market value of Greek bonds.

The environment is still very challenging. Domestic demand is hardly picking up in Europe. Globally growth is still challenged or sluggish except perhaps in the US and in parts of the developing world. All that makes it too hard amid Euro-bickering and continued challenges to be too upbeat on the small uptick that the Euro-Area PMIs have made over the past few months, an uptick that is starting to down tick already, at least for services.