EMU PMIs Surprise As MFG Rises And Services Weaken...The Real Zone Emerges: The Austerity Zone

Another Split decision - The Euro-Area PMIs were split in October as the MFG index rose and the services index fell. While the two indices have been tracking together in this expansion for several months, that tracking has been an illusion of parity. The MFG index at a level of 54.11 stands in the 68th percentile of this historic range by queue compared to the services index that stands only in its 41st percentile at a level of 53.19. The Services index historically has much greater stability.

MFG and services are more different than you think - The MFG index varies over a range of 27 points compared to a range of 23 points for services. The series variation is 8% of its mean for Services compared to 10% of its mean for MFG. At the current levels, MFG is much stronger relative to its historic values than is the services sector as the percentile of range figures reveal. You also can note the MFG is farther above its mean than is the services sector.

German separates further from the pack - The zone continues to see activity as uneven. This month Germany distanced itself from the rest of the Zone as both its services and MFG PMIs advanced. This split is going to create more tension in the Zone and for the ECB as the German (Bundesbank) influence inside the ECB is strong and Germans will have their own economy as a template for Europe far more than they should. Already Axel Weber has been lobbying Trichet to back off from the special securities purchase program and has been rebuffed.

Service sector slippage hurts - Moreover, the fact that the services sector is relative weak is bad for the prospect of job growth in the Zone. The service sector is an important sector for job growth and it is not only weaker relative to its own historic standard but losing momentum. The riots in France (I should, in a more politically correct tone, say, 'protests' over changing the retirement parameters) late in October can only contribute to more weak readings when the November index is up for assessment.

The Euro-Area - Europe is slipping despite the success of Germany. Germany is not helping Europe to pull itself up by its own boot straps but instead it is using the German export machine to crush Europe under its boot heel. It is continuing to try and get less accommodation from the ECB because that is best for Germany even if it is not best for the Zone. Germany already has pushed its own view of austerity onto the G-7 at a time that such a move seems to be a bad idea. But at the time of the G-7 summit the US was politically weak and its president, while loved in Europe, is inexperienced internationally. Europe is not taking any advice from him.

The worst of Europe - So Europe is caught in the worst of its worlds. It has to beware of Greeks bearing debt and of Germans giving financial advice. The Greeks have done what they have done and its damage has spread. The Germans are still in a position to influence events. The UK economy is the most recent example of a nation that has adopted a policy of strict austerity in the Wake of Greece's debt revelations and Germany's austerity stand. The UK is just beginning to feel the bite. The UK is not an EMU member but it is in the Zone and now that includes the austerity-zone.