EMU Flash PMIs Tell Mixed tale…Improvement Continues But Pace Slows In Services (Jobs) Sector

As the ECB is holding policy steady and ECB president, Jean Claude Trichet, is telling us that the expansion will be moderate but uneven, the Markit PMI’s are giving us some really mixed news that makes The Trichet comments look positively upbeat. While both the services and the MFG sectors are still expanding in the e-Zone only MFG was expanding faster in January than it was in December. The services sector stepped back to a pace that is the weakest we have seen in four months since services made the cross-over into positive growth territory.

While manufacturing usually is the leading sector, what is disturbing about the services sector setback is that services is where the jobs are. MFG may be the normal leader, services is where the core of the jobs is located and is the sector households need to see improve for their fortunes to rise. Just a day ago several German officials were speaking about the economy, one, Chancellor Angela Merkel, the other, a Bundesbank Board member, with both of them saying the same thing: for Germany, domestic demand would have to do more of the work exports alone would not be enough to foster growth. For Europe the same is probably true. But if consumers do not go back to work - and that means, if the services sector does not get on solid footing - even Trichet’s luke-warm expectation for a moderate recovery may be at risk.

We know of the problems in Greece with debt and Spain with real estate. Germany is embroiled an argument over whether its budge deficit is cyclical or secular and that argument is really about how quickly it should addresses its deficit. Iceland is going to have a referendum on its financial responsibility. The UK is improving but posted a chilling inflation number. Italy has been a surprise with a recently surging MFG sector. France after looking more solid is now expecting less and is trailing other large EMU nations. The idea that the e-Zone recovery will be uneven is not hard to swallow. How strong or lasting it will be is something that will come under scrutiny especially if the service sector can’t get turned around soon. Because of the prodigious social welfare throughout the e-Zone, the service sector is not quite as critical as it is in the US. Still the Euro-backtracking on what we thought was recovery progress is a chilling and unexpected result on the day.