Euro-Area Service Sector Heads South And It’s Not Even Winter

Services, while generally viewed as nontradables, are showing a remarkably consistent drop across the largest most developed economies. That is interesting since these sectors are not linked by trade by are captives of their respective domestic economics. Since the manufacturing sectors are well connected and these too are showing declines the obvious conclusion is that there is global slowing in progress.

There is not some MFG slowdown that is isolated and traceable back to Japan's disasters, though those probably are contributing factors. This slowing has run too far afield to be explained by Japan. Rather the US data that has identified a more generalized soft spot appears to be a real slowing and is perhaps spreading. Sort of like the expression, ‘one rotten apple spoils the bunch.’

Of course separate but not wholly unrelated US and European debt problems are also a factor with common timing to the US and European slowings.

In EMU the service sector drop is the ninth largest on record since January 2001. For Germany, with a longer series of PMI values, the drop in services is the fourth largest since August of 1998.

While the European PMI sits in the 57th percentile of its high-low range it also sits much lower in an ordered queue of historic values, at the 24th percentile. That means that the EMU services PMI is stronger than this 76% of the time. That is a very poor figure.

Most EMU members in the table rank in the 45th-60th percentiles of their respective high-low ranges (see the table for the standings). But in terms of their queue standings, the results are grim to grimmer. France stands in the 26th percentile of its ordered queue, Italy stands in its 14th percentile, Spain stands in its 15th percentile, Ireland stands in its 37th percentile (June), and the UK, an EU member, stands in the 52nd percentile of this ordered queue. Germany stands in the 48th percentile of its queue, much higher but still not strong.

For the most part these are poor readings. No country has a strong reading.

Consumer confidence expressed as a queue standing also is much weaker across these countries. Germany is the exception with a confidence standing in the 91st percentile of its queue. From their things drop off very fast with Spain in the 46th percentile, France in the 40th percentile, The UK in the 11th percentile and Italy in the bottom one percentile.

Readings for services and Consumer confidence diverge and not in a very consistent way. In Germany consumer confidence is still quite high but that has not translated into the kind of spending that would boost its services sector. Elsewhere both services and consumer sentiment are in bad way.

The sharp drops in the services sector this month and the low standings are real disappointment. They are things of which to be wary. They certainly do temper any optimism that might try to build.