PMIS Show Continued Growth In Europe

The EMU PMIs are up again – and, for the second month running, the overall business index is over 50, showing positive growth. The two main PMI components improved again in September with MFG index up to 40.04 from 48.24 and the services index up to 50.61 from 49.92.

The MFG PMI is at its highest since June of 2008. The services index is at its best value since April 2008.

The more detailed results show that Germany is suffering some setbacks and cross currents. That is in-keeping with other German indicators we have recently seen. In France the improvement continues to move ahead, with a national index of business sentiment also up sharply in September.

‘ V-shaped’ recovery -- Europe’s PMIs continue to sketch out a recovery that is very “V-shaped.’ The MFG PMI fell from 50 to its cycle low in eight months. Now after eight months it has risen from its low to 49.04 , nearly back to 50. The Services PMI slipped to its cycle low in nine months. Now, seven months later, it is above the neutral mark of 50.

Beyond the diffusion world of the PMIs - Of course the indices are not yet back to their respective cycle peaks. But that typically does not happen until the cycle itself actually peaks which is a long way off (we hope). For now the recovery has been unfolding apace. The more detailed news from Germany suggests that the pace of recovery may be in store for some slowing, from a diffusion standpoint. But there is plenty of room for the expansion to spread in terms of real readings like orders and industrial output and job growth, even if the PMIs do not advance very fast from now on. PMIs are economic indicators; formally, they are measures of breadth- the answer the question, “what proportion of the industries are doing better, in terms of jobs, orders, overall performance and so on?” The PMIs do not answer the question, “how strong is the gain?” That is the next challenge, to expand the increase in orders and in output that has begun, and to extend the expansion to include job gains. Then the task is to continue to show staying power across sectors. Indicators like the diffusion-based PMIs can be very useful, but they fall short of giving us the true welfare picture of the economy.

Shifting the focus - For this cycle the PMIs have mostly done their job. They flagged the slow down and the move lower in the economy ahead of most traditional economic variables and they also showed the way for the pick up. Now they will give us some indication of how the various sectors change speed. But the key reports from here on out will be the traditional reports that reveal true strength instead of just diffusion or breadth.