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Economy in Brief

EMU Service Sector Leads!
by Robert Brusca  March 4, 2015

The finalization of the EMU PMI indexes brought slightly weaker values to the report. Still, both the manufacturing and services sectors of the EMU are improving in February compared to their January values and each sector is showing advancement. However, the progression of the moving averages still shows very little in the way of momentum despite the upkick in the services readings that looks so dramatic on the chart.

The table presents a sequence of smoothed average values over three months, six months and 12 months. On that basis, there is little lift in the EMU private sector or either of its key components. On this basis, Germany still shows a decelerating tendency dominated by a withering services sector. Of course, the last two months of German data tell a slightly difference more upbeat story than the moving averages at least for the services sector. France reveals a still-withering manufacturing sector with services beginning to stir in both their moving average sequence as well as in the monthly data. Italy is floundering near its boom-bust line. Spain is stuck at a more robust reading around +55 while Ireland also is stuck at a much more robust level around 60.

As such the overall EMU business environment stands in the 64th percentile of its historic queue in February, led by services which stand in their 74th percentile and dragged backward by manufacturing which stands dead-centered on its historic median value at 51.1. The German private sector sits below its median at its 48.4 percentile on a weak 43rd percentile standing for manufacturing versus an improving 58th percentile standing for services. Of course, on other measures, most notably recent retail sale sales reports and GfK consumer climate, the German economy is doing much better than this. By comparison, France garners a 66th percentile standing for its private sector on the back of a 30th percentile standing for manufacturing and a 66th percentile standing for services. Italy has a private sector standing in its 54.8 percentile. Spain and Ireland are much stronger with each in its respective 93.5 percentile.

Parts of the EMU are doing quite well compared to historic experience. Still Spain's PMI ranking belies its high unemployment rate even by historic standards. Germany's low standing belies its low rate of unemployment and terrifically high assessment of the economic climate. Even the PMI gauges tell only a partial story of what is in gear in these respective economies. The U.K., an EU member, stands in the 66th percentile, a top one third standing on the PMI gauge.

We can conclude that there is something substantial that the PMI gauges from Markit are missing. Clearly, Spain is overrated by the PMI gauges based on the slow progress of its labor market and lingering high unemployment while Germany is underrated on the same gauges as well as by its retail performance and its consumer attitudes and taking account of its fiscal positioning.

What we see memorialized by the PMI gauges is some assessment of the sector performance and not of overall welfare in the least. That Spain and Ireland are each doing so well on the PMI gauges is good news since each of these countries is trying to dig out from under its own special economic mess. France has been given a special allowance for a debt deviation from EMU rules and so is struggling to get its fiscal house in order but given that it has been allowed some slack it can let its incipient recovery continue to take hold. France still has its odd 35-hour work week that it thinks is a job creator and the rest of the world thinks is a SOP to lower productivity. France may yet have to decide whether to scrap it.

For now there are some signs of progress in the PMI data. We reported some very good news on German retail sales yesterday that today was echoed in the euro area as a whole- largely on the back of that improved German report. We lauded Germany for its recent set of economic data and economic/political decision to take steps that might have positive repercussions across the euro area. For now the euro area data and trends are pointing in the right direction even admitting that there is a long way to go and that progress is slow. There is still a very long way to go on Greece. What is lacking on the Greek front right now is evidence that the Greeks themselves are willing to shoulder their own burdens as did the Irish, Spanish and Portuguese. The rest of Europe still seems to be bending over backwards to try to accommodate Greek `needs.' But Greece's most pressing need is to sign on to work harder instead to ask others to carry more of its heavy load. Many in Europe already are carrying a load of significant proportions.

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