PMI Round Up for EMU and Elsewhere Finds Solid to Strong Readings Predominate

The services readings and total PMIs are being presented or finalized in the IHS Markit framework. In the EMU, manufacturing and services currently have the same rank or queue standing at their respective 98.6 percentile. In this timeline, a reading that is this strong or stronger only 1.4% of the time (98.6 percentile standing) is also the maximum reading on the timeline. In Germany, services, manufacturing and the total PMI gauge all have strong readings. For its overall gauge and for manufacturing, the ranking represent timeline maximums, but not for services which are nonetheless strong at a 93.0 percentile standing. France has a maximum reading for manufacturing and a strong but not quite maximum reading for services and its headline. Both of them have a 97.2 percentile standing; thus, marking each as a second highest standing on the timeline. Italy has a strange headline standing that exceeds the standing of each of its components separately. Obviously, it is the combination of the two strong sector readings that has elevated the composite. Italy's sectors have very solid and strong 95.8 percentile standings. Spain is the unusual one among the big-four EMU economies. It has done so well for so long, but now Spain's headline has only a 66.2 percentile standing on a strong 95.8 percentile standing in manufacturing and a weak, below its median, at a 46.5 percentile standing for services. The service sector averages show a steady reduction in Spain in their levels over 12 months to six months to three months.

The U.K., at this point still an EU member, has a composite ranking like Spain's services at its 46.5 percentile.

China's manufacturing and services readings are low-to-moderate, but both sectors show expansion. China's manufacturing gauge at 51.5, nonetheless, has a 90th percentile standing underscoring how long China's manufacturing sector has been weak. China's service sector reading is a 53.9 but still has an 88.7 percentile standing. Note that Spain with a service sector diffusion reading that is stronger at 54.6 has a much weaker standing at its 46th percentile. Services sectors tend to expand and tend to require higher diffusion values to have comparable standings to manufacturing index at least for values close to 50. On the other hand service sector readings tend to top-out sooner than manufacturing sector readings and reach their own high points at lower diffusion values as we see in the table below.

China's gauges show that it is doing well in comparison with recent experiences, but its service sector comparisons to Spain reminds us that it is still not doing that well in absolute terms.

The U.S. readings draw from the Markit surveys and on that basis manufacturing is solid if not strong and services are weak. At 53.7, the U.S. services gauge has been lower only 32.4% of the time in the past six years. And that has not been a period of special relative strength for the U.S. economy.

On balance, the finalizing of the PMI gauges rarely brings big surprises. But the finalized readings are showing growing strength in manufacturing in the EMU and in the West. China is an exception and so is the U.S. at least in the Markit PMI framework. Services sectors are prone to flat-lining or to very modest growth trends but with the December readings generally showing more lift than the three-month average for Q4 (the U.S. is an exception).

A related finding I have made on U.S. data is that while the manufacturing PMI readings are strong more or less across the aboard, in the U.S. the relationship between manufacturing IP and the PMI gauge has shifted. For any given PMI gauge in manufacturing, U.S. IP is weaker than it used to be. These findings draw from analysis of U.S. ISM manufacturing data and U.S. manufacturing IP. I have not yet explored the extent to which this is generalizable across other countries. But it helps to resolve the observations that PMIs are strong yet growth is only moderate. We should probably not be waiting for growth to rise up and surge forward to align IP better with the PMIs. It is just a new relationship between PMIs and IP.

Also, I'd like to remind observers of PMI data that they are diffusion indexes which measure the breadth of reported increases; they do not formally assess strength although most observes infer strength from breadth. And with GDP growth tracking higher on a moderate basis, it is entirely plausible that without strength getting that much better breadth is improving. That is just something to bear in mind. Just as height is not weight, breadth is not strength. And in the case of the PMI data, the breadth/strength relationship seems to have shifted in the post financial crisis environment.