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Economy in Brief

PMI Progress Breaks Off in August
by Robert Brusca  August 23, 2021

The Markit flash PMIs were weaker across the board in August for every entry in the table except for U.S. manufacturing; that module moved higher on the month. However, the thrust of the weakness was not uniform. In the EMU, the overall PMI gauge weakened by 0.6 points on the month. That is more or less in line with what France experienced. But Germany lost 1.8 composite points. Japan lost 2.9 composite points and the U.K. lost 3.9 composite points while the U.S. shed a gargantuan 8.2 composite points (these changes are preliminary and reflect the difference between this month's flash estimates and finalized data from a month ago).

Germany stands alone in this group taking its biggest hit to its manufacturing sector where the PMI drop month-to-month was -3.2 points, far larger than the services drop of only -0.33 points. Elsewhere it was the service sector that was pulling the composite PMI down by the most. The U.S. saw a service sector drop of 8.9 points, the U.K. service sector shed 4.1 points, and Japan lost 3.9 points. France also stands alone with relatively small drops in both manufacturing and in services in August -0.7 points and -0.4 points, respectively.

On balance, France and all of the EMU experience relatively small PMI declines on the month and for France there was more or less equal weakness in manufacturing and in services. Within the EMU, Germany is an exception with much more manufacturing weakness in an economy that is very manufacturing dependent. The size of the German economy passes some of this weakness off onto the EMU as the EMU also has more manufacturing weakness than service sector weakness and it has less service sector weakness than either Germany or France, its two largest members.

Elsewhere it begins to look as though trouble with the virus was a dominate theme on the month. Because of the much greater service sector weakness and since the service sector is also the job sector this is a warning shot for monetary policy especially in the U.S. where inflation rates and unemployment rates are the 'twin targets' for monetary policy month-by-month at this stage. Up to this point, in the U.S. inflation had been surging and unemployment has been steadily dropping; yet, unemployment is still above the last cycle trough. If this PMI weakness is transmitted to the labor market as fully as it is represented in the PMI survey, monetary policy could be put on very different footing than it was coming into this report.

However, PMI data on the service sector do not fit the real economy as well as they do in manufacturing. Perhaps the service sector and implied job weakness will not materialize in 'real world' data. The next round of job data will be with us soon. But for now these reports raise anxiety about the prospect of economic progress and about the potential for continuing job market gains. This comes as the virus is spreading again and as the news on the virus, how it spreads and the efficacy of the vaccines seems to be getting grimmer. Perhaps to counteract the pessimism, the FDA today gave the Pfizer vaccine its full authorization.

To this point, U.S. jobless claims data have not been pointing to the sort of weakness the U.S. service sector PMI is pointing to. As for Europe, it is hard to tell as well. In Europe, the EMU is not as affected nor is France, while Germany is backtracking after the substantial hit to its manufacturing sector. We will be watching to see how this plays out. The future remains unknown and these recent reports are reminders to forecasters to be humble because unexpected things happen and that the virus is the 'quintessential unexpected thing.' This is a lot to put in the mix ahead of what used to be a globally well-attended Kansas City Fed symposium in Jackson Hole, Wyoming, a meeting that has focused on some important economic or monetary topics of interest each year. Instead of an in-person meeting this year, the meeting is virtual. But the policy background seems to be increasingly tenuous.

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