US Services ISM And Euro-Area PMI Track

Both the EMU and US services indices backtracked in September. For the US the backtracking was only in activity as the headline for the Non-MFG PMI (not only services') did rise. The level of both the US and EMU sector barometers continues to signal expansion. But what is always fascinating to me is how well the mostly-services indices track one another in the US and in EMU where the services sectors are essentially unrelated.

Services are traded internationally, but only special services. The bulk of the service in the ISM and PMI indices are non-traded goods and not competitive with each other because of their intrinsic local characteristics. Think of waiters at your local restaurant, of dry cleaning services, of auto repair, of lawn mowing services and of Air-conditioning repair and so on.

These indices track each other because the rest of their economies track so well. There is a developing point of view that the rest of the world is going to continue to grow as the US sags. I remain skeptical of this notion since the US a pivotal economy in the world trading system. Its weight may be shifting but the shift has not been complete and the US remains the center of gravity for growth- withal due respect to China.

The tracking of the US and EMU services sectors speaks to how well connected these two regions remain today and how wary we should be of the notion of a coming disconnection or lack of synchronization. These sectors have the same major business cycle turning points to within a month or so with few exceptions. They share many minor business cycle fluctuations as well.

Of course the goods sector, manufacturing, is responsible for the more direct linkages but what we see in the 'services' sectors is how fundamentally connected these economics remain.

The service sectors in the US and in EMU have stepped down from their early recovery pace. It is not clear how far this will progress. Will growth be terminated by continued erosion or not? There are varied opinions on this. Most economists, myself included, do not think we have another recession in train. But we do have a slowdown with some ongoing elements. We do not have inflation. In the US we are hoping that the service sector is not going to slow but is going to advance since it has not had a real recovery from the recession yet. But the data that speak to this issue are mixed. Still-accommodative central banks around the world are trying to push economies forward. Central banks may be on the verge of becoming more accommodative; the Bank of Japan just took another step in that direction. But we also have a lot of consumer wealth destroyed and in the US existing contracts (mostly mortgages) hamper monetary policy and reduce its effectiveness.

It is not clear that the world economy is at any sort of cross roads. But it is a time of some sort of transition; that much seems evident. There are more heated trade disputes in train. The US and China seem ready to go at it in a more serious way. Brazil has accused countries of engaging in currency wars of depreciation. These are risks to the continued expansion of the business cycle. The services sector will continue to be the best variable to signal what is really going on since it is more buffered than the volatile goods sector and is likely to reveal trend. So far so good, but the services sectors are issuing warnings with their continued weakness and the US sector is on notice for not yet having experienced anything like a true recovery. On Europe the jury is till out as well.