EMU PMIs show continued stress

The good news is that the PMIs for August did not simply continue to decay. The bad news is that there is really not much of a bounce. And that the service sector did continue to decay but by a small amount. By comparison the MFG sector index rose and did so by over one full point. But both MFG and Services give off feeble signals. Each index resides in the bottom 9% of its respective historic queue of values (each is higher about 91% of the time…) stretching back to July of 1998.

Both the chart and the table show that the speed of the decline in the PMIs has slowed down over the past year. The big slowdown and index drop came in 2011 from elevated MFG readings in the high 50s and services in the mid-50s. Currently the three month MFG index is only about two points weaker than its 12-month average while services is not quite one point weaker on the respective comparison. Still, the breakeven point is at 50 and both sectors are below that and have been lingering there. Both are ‘somewhat’ above their expansion cycle lows as of August (see chart).

Germany has posted a rise of nearly two points in its MFG index in August but its services PMI has declined by two points, and at 48.3, now resides below the breakeven level of 50. As the leading economy in the Zone this split gives us a dilemma. Germany does depend on domestic demand but in the business cycle domestic demand lags and Germany is led to better times by its fabled export sector. Germany is seeing weakness in its services, or jobs, sector but it is getting a boost in MFG- is that from exports? No. Germany has held out against weakness in the rest of the Zone by exporting to China. But China is also seeing a step back in its activity. It is not clear apart from a one-month bump in the road how Germany would keep its MFG sector improving in the face of ongoing global weakness, weakness in the Zone itself and weakness spreading in its domestic services sector. Indeed, German firms reported weak new business in August as new export orders fell sharply. Export orders posted their weakest value since April 2009, according to Markit, that issues these indices.

The German figures and trends raise questions about the ability of German growth to endure since the demand in the Zone clearly is weaker. At this point German growth leadership has to be doubted. However, for the month both French indices improved as the French MFG index rose by nearly 3 points on the month but it still signals declines and French services is skating on thin ice at a value of 50.2. The biggest improvement in French MFG (which is still contracting) came from a lesser decline in new business, meanwhile existing business also declined by a bit less in the month.

Still these are hardly good marks for the two largest economies in the Zone. One month does not make a sustainable rebound. And the odds that there can be repeat improvement in September seem low especially when painted against the backdrop of ongoing troubles in the EMU area. Weakness in the UK, encroaching weakness in China, a VAT tax hike in Japan that will not stimulate activity there, and a still floundering US economy do not make for a bright export future outside the Zone. Domestic demand conditions in EMU have to be scored negatively (several nations are still under austerity mandates!). Despite some competitiveness improvements because of a weaker euro the outlook for foreign demand from the EMU perspective must still be pretty grim.