European PMIs Remain Lethargic

PMIs continue to strike a weak note. In December, manufacturing flash PMIs are overwhelmingly weak and registering contraction. Service sector gauges are weak across the board and show declines episodically in December. The queue ranking of the flash gauges shows pronounced weakness, with France showing the most resiliency on a ranking basis. For France, this result is partly owing to better performance now and partly to a weaker history to compare current performance against. French manufacturing does has a 4.4 point higher diffusion value in December than does the euro area but the French services sector in December has the same diffusion value as for the EMU yet hoists a queue standing that is 30 percentile points higher than it is for the EMU.

The PMI values are weak again this month. But both manufacturing and services readings are off their cycle lows. For most countries in the table, this means that the current manufacturing PMI value lies above the values posted in recent months; for France, the current reading is also above some more distant observations.

As a result, while the current manufacturing and services readings are not cycle lows, the readings are weak and remain weak relative to historic standings. The sense of lift from cycle lows is too tentative to place any faith in it as a new or lasting development.

The U.K. has just stalled a conservative government headed by Boris Johnson apparently giving him the mandate he will need to conclude the Brexit negotiations with the EU. But what is also apparent is that he is inheriting a weakening British economy. Britain was plateauing in 2017, but since that time the composite index, manufacturing and services PMIs have been in a more or less steady state of erosion and show less of a sense of stability than the readings for the EMU.

In contrast, the EMU readings have been flat since September which gave the last hint of even modest erosion. The U.K. readings moved sharply lower in September and now manufacturing is barely off its cycle low after a significant weakening this month. Germany has had much the same rough ride as the U.K. economy, except that early in 2019 the services sector started to show life but that suddenly gave way in September. As a result, Germany is sitting at near-low readings for services with the exception that November brought a shot of improvement to manufacturing that helps to carry the current reading higher despite December's slight manufacturing erosion. France has been in a waffling flat-lining range since June.

In contrast, Japan has had a substantial drop that hit a decisive low in October on a sharp drop and has logged some mild improvements since then.

For the U.S., the Markit gauges show the most substantial pickup with the services and manufacturing index generally on an upswing from lows made in August. Of course, in the U.S., there are other issues such as the ongoing drop in manufacturing IP even as the Markit manufacturing gauge rises. The ISM manufacturing gauge, in contrast with the Markit gauge, has weakened and remained weak. The broader U.S. nonmanufacturing ISM is still erratic but still engaged in a trend decline; last month its activity gauge showed exceptional weakness. It is hardly looking like it is part of a move to stabilization. Basically, the ISM surveys undercut the upbeat message in the Markit survey for the U.S.

In defense of the new observations, we can point out that the early stages of a rebound are going to produce a lot of mixed signals and may even be prone to future revision that will change and clarify their current message. On the other hand, there is nothing in the works here that screams rebound(!) or enough(!). Economists want to forecast a rebound, but so far the data are not on that page. The German ZEW forecasters have marked up their outlooks substantially although what they present is still very weak. At the same time, their assessments of current conditions remain depressed and have improved only marginally.

As for fundamentals, there is some – but only some- uncertainty being swept away. The U.S. and China have a phase-one trade deal, but it is leaving a lot of tariffs in place. That suggests that the U.S. got only a modicum of what it wants and we know that progress for phase-two will be more hard-fought. We can surmise that the Chinese, while agreeing to phase-one provisions, are not very happy about it since we do not hear China saying much about it. In its home market, the deal was announced by a lower level official not like the U.S. where President Trump unleashed the power of his mighty Tweet. Trade negotiator Lighthizer also has held forth on the deal saying how much the U.S. gained and yet he has also offered a sobering look at the future and for prospects. While Boris Johnson is in position to cut a Brexit deal, that uncertainly is still there for now. So it's too soon to start whacking at the piñata even over the USMCA.

To compound the difficulty in handicapping global growth and trade, there is recent weakness in U.S. retail sales the driving force behind U.S. GDP. However, there is some recent strength reported in China. European data largely have continued to be weak. Today Japan's domestic industry gauge showed a sharp drop for its tertiary sector (services); while that is a trailing survey (in terms of topicality), it is not encouraging. Optimism remains in the eye of the forecaster. At this point, I would not place a large weight on phase-one or on expectations of a Brexit deal or even a new USMCA for changing the economic landscape all that much. I recommend putting optimism on hold for the holidays. So far, the good news just has not been good enough.