EMU MFG Recovery Loses Up-Thrust; UK Shows More Reversal

The Markit-NTC MFG indices show a step back in activity levels in March. The index readings are still strong, representing an 89th percentile standing for the entire EMU in its historic range and a 94th percentile standing in the case of Germany. But there is a significant loss in momentum in March with all MFG sectors –except in Greece – weakening.

The range standings of the MFG indices divide up into cohorts of sorts. Most of the larger most industrialized economies are uniformly strong. Still there are some obvious exceptions. One not-so-obvious exception is France whose standing is only in the 68th percentile of its range. Germany, Italy and the UK are so much stronger in their relative range standing values, that France sticks out although its absolute reading is similar to that of Italy. Also surprising is Ireland with its MFG index holding in the 95th percentile of its range; its banking sector and debt problems have not adversely impacted its MFG sector, or at least, not yet.

Spain as a somewhat troubled debt-ridden Euro nation has its MFG standing still firm in its 80th percentile, while Greece is scraping bottom in the 34th percentile of its range although with a rebound this month.

Ireland, in fact, is doing the best at staying near its peak value for MFG. Ireland’s MFG index is only one index point from its cyclical peak; the next best, Austria is 1.3 points from its peak. But at present the German economy has posted the best recovery in the sense that its MFG sector has had the largest point rise from its cycle low, a gain of 29 points. Austria is second with a gain of 27.5 points; Ireland is a bit farther back in the queue but with a 22.5 point rise from its cycle low it has also made a sharp recovery and kept manufacturing conditions closer to its cycle peak. Germany, we should note, reached a new cycle peak last month and has fallen back from it; Ireland nearly so.

Spain has managed to mount a 23.2 point rise from its cycle low even with its economic and debt problems and its austerity program in place. Troubled Greece has not done as much as it is only 7.2 index points up from its cycle worst. It is wallowing.

What we see in the EMU region is a clear sign of a substantial recovery. Still countries are in various positions relative to their past peaks and cycle lows. We know that MFG is the part of these economies that has performed best. Services sectors are lagging, job creation also is lagging, as is consumer confidence. Consumer mood which is red hot in Germany is cold as ice elsewhere in the region. The hot manufacturing sector has only so much influence on economic sentiment since it is the sector where output is driven by few workers many machines and lots of productivity. A rebound in MFG can do a lot for GDP without bringing a lot of jobs back on line for the economy as a whole and that is the ruckus in Europe as well as in the US. Europe has the added issue of a very uneven recovery that cuts along still formidable country lines and exacerbates political tensions.

The top chart shows how closely the EMU, UK and US business cycles have tracked according to these MFG PMIs. The ones from Europe are readings from Markit while the US is from the ISM. Right now the UK is making a strong move lower as the BOE struggles with over-the-top inflation and long awaited evidence that the real economy is suffering from the austerity programs that kicked in with full force in January. In EMU there is slowing but more than that a great deal of unevenness across the union that makes policymaking tough. In the US the MFG sector is showing only the slightest of backtracking in March. Its ISM has much longer history than these European measures and the current US range standings are incredibly high relative to a much longer historic experience. Still the US services sector is lagging dreadfully this excellent MFG response.

Despite concerns about US debt and ongoing question marks about US monetary policy it would appear that the US is the stronger economy among this group of three. Still the global economy is undergoing strains and policymakers still have a chance to make or break their reputations in this still difficult economic cycle.

Buyer –and seller- beware.