PMIs Remain Weak But Give Off Mixed (Up) Signals

Let's begin looking at conditions in Europe. The graph tells the over-arching story of a weakening manufacturing sector whose weakness has largely been resisted by the services sector. Sure, both services and manufacturing are in longer term downtrends, but since late-2018 there has been – or rather there HAD been - a resisting and even counter move higher in services. That view is under revision as the services sector has softened and its PMI gauge in the EMU fell by 0.7 diffusion points in November. However, at the same time manufacturing weakness appears to have lost some momentum. Still, the services sector carries the larger weight so the result is a weaker EMU PMI composite reading in November. The moving averages of the EMU PMI composite and EMU manufacturing have been weakening. Services saw some firming over six months, compared to 12 months but now the EMU three-month services average is below its six-month and 12-month readings and showing slippage. That is no path to a rebound.

In addition to those momentum comparisons, manufacturing despite its index rise is still contracting and is contracting on balance in all its averages out to one year (see Table). EMU manufacturing contraction is ingrained and is broad-based. The queue rankings on data back to early-2015 are of course extremely weak.

Germany shows manufacturing weakness; its averages show contraction on all three timelines as well, but the German reading for manufacturing has a significant rise in November against trend. German services, however, erode just a bit more in November and the services sector shows weak expansion.

France is simply different and stronger. Its rankings are more mid-steam and its composite index is up solidly and strongly on the month. French manufacturing is also up on the month and its averages show no contraction over the past year (see Table). French services have been gaining footing and this month the services sector makes a solid month-to-month gain. But France has been like this and France is better characterized as ‘stable' and growing than as ‘strong.'

Japan, on the other hand, is weak caught in the middle of a trade war between its two largest trading partners China and the United States. Japan's composite PMI shows contraction and has done so for two-month running. Japan's manufacturing sector shows contraction and it contracts on all three timeline averages. Services in Japan have had a steady reading in its three-month six-monh and 12-month averages. This month the services sector crossed over to show expansion after showing contraction in October.

For the U.S., we use Markit data here because that is the only survey available. I prefer the ISM which does track the primary U.S. reports more closely than does Markit data. The U.S. composite and sector PMIs from Markit show slipping averages over shorter and more recent periods with the small exception of a slight manufacturing improvement over three months compared to six months. As to monthly data, the U.S. composite has been creeping up monthly. Manufacturing has remained in contraction with no trends evident. The services reading has moved up slowly.

A rebound in the making?
There is talk of a U.S.-China Phase-One trade deal. Brexit seems to have a solution, but U.K. elections keep that hanging in the balance. In addition, the recent ZEW survey, a survey of the opinions of German financial experts, showed a sizeable upward revision in that group's macroeconomic expectations although the economic conditions they assessed remained unaffected by that optimism. In any event, there is some optimism about the potential for a rebound. Does that view get traction here?

Largely it does not. There is some rebound in manufacturing in the EMU, but it is minor and the sector is still well into the contraction zone. France has been an outlier in terms of showing stronger performance for some time; that is not a change. Moreover, in Germany the services sector is weakening. There is a question of whether services has carried too heavy load and is now paying the price. The service sector in the EMU also is weakening. Markit data hint at some U.S. improvement, but it is a very vague hint. U.S. regional Federal Reserve Bank surveys have showed weaker conditions in the NY region and some strengthening in Philadelphia. Again, that is hardly decisive.

Not only is there very little to go on, there are few policy levers left to pull although policymakers deny this so they do not seem so helpless. None of them wants to go back to a program of QE (large scale asset purchases) unless there is no other choice.

The main ground for optimism is that the drum beat of trade war may be silenced or muted. But is that enough and will that really bring commerce back on track? Remember the pending trade deal here is one that intends to muzzle China to some extent.

The geopolitical background is still quite poor. There is palpable geopolitical and economic risk on a global scale. In fact, I argue that there are so many hot spots that they are being ignored more than they are being assessed and properly discounted. I see the risk environment as high and I disagree with the Federal Reserve Board staff assessment that the risk to its forecast is ‘historically normal.' It's not. The U.S. has a presidential election cycle next year that will occur amid the most fractious political divide in the country perhaps since the civil war ended. Businesses will not know what to plan for. I am not a fan of this notion that the global economy is set to accelerate. The OECD just warned that global warming and the unclear approach to it by countries will be further impeding investment prospects for the year ahead and more. I am more concerned about the outlook… not less.