Euro-Area Services Sector Slips

There is slippage this month in the European services sector. At this writing the US report on 'services' is still unreleased but the previous US report for April on NonMFG activity in the US took a huge drop one month ahead of the even larger drop experienced by the US MFG PMI. In Europe, the slide is more gradual. The largest EMU economies, Germany France and Italy slipped in May while Spain and Ireland showed some improvement. Manufacturing has been slipping in EMU for several months but so far the impact on services has been muted. Despite slippage in their services sectors Germany, France and Italy each saw some improvement in their consumer confidence readings for May. That much disconnection is good news.

The standing of the services index for the Euro Area is in the 78th percentile. Germany stands in its 75th percentile, France in the 87th percentile and Italy in the 51st percentile. But when placed in their ordered queues the percentile for Italy drops sharply. By rank the Italian reading is in the 24th percentile implying that is stronger than this 76% of the time. Spain's 70th percentile range reading also is weaker on queue basis where it stands in the 35th percentile and is higher than this 65% of the time. Ireland, is a lot like Italy, as it stands in the 57th percentile of its range but in the 27th percentile of its queue. The readings for several of these EMU nations are extremely weak. Dropping from such low levels is not good news at all. The absolute levels for services are misleading as the queue standings give you a better idea of where the sector stands relative to its historic norms. And the service sector usually does expand, being above 50 is no big deal; being below 50 is a big deal.

What we see is that the Zone is showing a more rapid drop off in its MFG sector which had reached a higher plateau in recovery. But now the lower-flying service sector also is being affected. The drops in Europe are not as extreme as in the PMI indices for the US but they are eye catching and worthy of question-asking. We cannot say if this is a normal/benign recovery-to-normal-expansion slowdown or something more ominous. We have many reasons to fear a more ominous factor is in the works behind the scenes but for now we just don't know. Stay tuned, stay alert and stay liquid.