Haver Analytics
Haver Analytics
| May 23 2023

Manufacturing-Services PMI Gap Grows in EMU

Global PMI data were mixed in May with more reports of weakening data than of strengthening data. Japan is the clear exception in May with strengthening posted for its composite, for manufacturing, and for services. Japan is on a string of consecutive increases in all three measures and is the only country in the table like that. The United States comes close with stronger month-to-month changes in all the PMI metrics except for manufacturing in the current month of May.

The EMU manufacturing is consistently weakening month-by-month with France an exception in May showing some strengthening. Germany deteriorates and manufacturing in the EMU measure deteriorates.

The United Kingdom shows mixed trends although in May it shows a strengthening in all three measures.

Composite PMIs In terms of the ranking or standing of the sectors, the strongest standings ranked on observations since January 2019 show that Japan ranks best with its composite in May standing on its high for this full period. With a high-low ranking of 100%, Japan has a queue ranking of 98.1%. The queue ranking tells us that it has been this high or higher only about 2% of the time. The next strongest composite reading is from Germany with a 71.7 percentile standing, followed by the U.K. with the 69.8 percentile standing. The U.S. has a 58.5 percentile standing. France has a standing at its 45.3 percentile mark, below its historic median for this period.

Manufacturing PMIs Manufacturing sectors are weak across the board with most of them having a bottom 15% or lower standings in their queue of data ranked from January 2019. The exception here is Japan with a manufacturing sector having a 62.3 percentile standing.

Service sector PMIs Service sectors tend to have firm to strong readings with Japan’s service-sector having a 98.1 percentile standing. Germany’s has a 90.6 percentile standing. The European Monetary Union logs an 83-percentile standing. The United Kingdom posts a 73.6 percentile standing. In the U.S. a 64.2 percentile standing is in place while France has a 56.6 percentile standing.

Mind the Gap… The relatively sharp widening in the gap for the diffusion reading of manufacturing relative to services began to occur in February of this year. The manufacturing and services PMI readings in the European Monetary Union were relatively similar in September and August of 2022. After that, conditions began to slip with manufacturing weakening more sharply. In February, the manufacturing-services gap bulged to 4.4 diffusion points; in March it widened again to 8.5 diffusion points; in April the gap ballooned to 11.1 percentage points; and in May the gap between the services and manufacturing readings stands at 11.3 diffusion points.

Different strokes for different folks... In August and September of 2022, European Monetary Union manufacturing and services PMIs were hovering around diffusion readings of 50. In August the manufacturing reading rounded up to 50 while the services reading was at 50.2. They both slipped to below 50 in September, worsening in October and then rebounding slightly in November, December, and January. After that, the two sectors began to go their own ways with manufacturing eroding steadily and the services sector firming. That occurred up until this month when the service sector slightly backtracked in the European Monetary Union although manufacturing has continued to weaken further.

Demand weakness There has been a weakening demand for goods globally we can see that especially in U.S. data where inflation for goods in the CPI has been much lower than it's been for services. While there is a great deal of focus on the impact of continuing high housing costs and of housing inflation on the service sector numbers, it's quite clear that beyond housing, service sector inflation is higher than goods sector inflation and that this is also correlated with better activity in the service sector than in the goods sector. This observation represents a global phenomenon.

Service sector demand still seems solid But demand in the service sector is holding up relatively better; it's not surprising that despite some slowdown in manufacturing and in GDP job growth continues to be relatively robust since the demand for labor to provide services continues to expand. The service sector is the labor demand sector of the modern economy. But this growing schism between goods and services is putting pressure on the economy and on the various sectors. Of course, it occurs at a time when inflation is high and central banks have been raising rates. Rate hiking would seem to exaggerate the gap between good sector and service sector performance.

Summing up The ongoing strength in service sector demand is supporting economic growth, but the day of reckoning may be coming with interest rates rising and central banks focused on controlling the inflation rate. Further rate increases could damp demand more broadly, not just the demand for goods. That could interrupt what has been strong demand for labor services and that could create an unfavorable dynamic that could bring the long-awaited slump in demand to the fore to trigger the long-awaited recession. Recessions come from somewhere, and we now may have something more specific to keep an eye on - the service sector.

  • Robert A. Brusca is Chief Economist of Fact and Opinion Economics, a consulting firm he founded in Manhattan. He has been an economist on Wall Street for over 25 years. He has visited central banking and large institutional clients in over 30 countries in his career as an economist. Mr. Brusca was a Divisional Research Chief at the Federal Reserve Bank of NY (Chief of the International Financial markets Division), a Fed Watcher at Irving Trust and Chief Economist at Nikko Securities International. He is widely quoted and appears in various media.   Mr. Brusca holds an MA and Ph.D. in economics from Michigan State University and a BA in Economics from the University of Michigan. His research pursues his strong interests in non aligned policy economics as well as international economics. FAO Economics’ research targets investors to assist them in making better investment decisions in stocks, bonds and in a variety of international assets. The company does not manage money and has no conflicts in giving economic advice.

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