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Economy in Brief

S&P Flash PMIs Are Mixed in May As Manufacturing Erodes Slowly
by Robert Brusca  May 24, 2022

Among the early reporting countries in Europe and Japan, the S&P PMI readings for May tilt toward weakness. Among sectors, only manufacturing in Germany, services in the U.K., and services in Japan are stronger on the month. In the European Monetary Union, manufacturing, services, and the composite index all weakened. For France, manufacturing, services, and the composite index also weakened.

Three-month trends, however, flip the switch on this trend as the tug of war between stronger and weaker comes to a standstill. Over three months, all the services readings are stronger except for Japan. All manufacturing sectors are weaker over three months everywhere except in France, where all three readings are stronger over three months compared to six months. Over three months, Japan shows all three sectors as weaker.

Comparing six months to the previous 12 months, all sectors are weaker except in Japan where all sectors are stronger.

Comparing 12 months to the 12-month earlier period, all sectors everywhere are stronger.

What we're experiencing is a revival in the PMI indexes compared to 12 months ago, but the six-month performance has degraded from that revival peak and then, over three months, performance has yet to form its identity for weakness versus strength.

Still, the risks to growth are palpable as central banks are hiking rates or preparing restrictive policies and as the Russia-Ukraine war drags on with all of its attendant risks and disruptions to global supply chains, food supplies, and mineral resources. Russia is using the war to disrupt the global economy as much as it possibly can. This is not an accident but part of the Russian objective.

The composite queue standings that rank the May readings against all other readings (in the same category country by country) over the last four and a half years show the relative strongest reading for the composite in France at a 92.2 percentile standing, followed by the European Monetary Union at 78.4%, Japan at 74.5%, Germany at 68.6%, and a U.K. reading that stands below its median at 41.2%. Except for France, which is clearly strong, and the U.K., which is clearly weak, the other composites are mostly in a comfortable zone. They're not strong, they're not weak, they're in their zone of comfort, largely because of firm service sector readings.

The strength in the composite PMI derives mostly from the relative strength in services. In France, the service sector has a 96.1 percentile standing; the European Monetary Union there was an 86.3 percentile standing. Germany has an 84.3 percentile standing; Japan has 74.5 percentile standing. The U.K. comes in at a below-median 41.2 percentile standing.

The unweighted service sector standings average 76.5%, above the 62.7% average for manufacturing sectors.

Manufacturing sector rankings are highest in Japan at an 84.3 percentile mark, followed by France at 68.6 percentile, the U.K. at 58.8 percentile, the European Monetary Union at 52.9 percentile, and with Germany, the relative weakest, at a 49.0 percentile standing.

Note that the percentile standings are relative measures. They measure and place each reading in its own queue of standings in the last four and a half years and so each country evaluates its sector relative to that sector’s own history. Therefore, Germany's manufacturing sector has the weakest relative standing. The raw diffusion reading for manufacturing at 54.7 is actually the highest raw diffusion score; however, since Germany tends to have a high score for manufacturing, it is also the relative weakest. That means the German sector ranks the lowest relative to its own recent history compared to similar rankings of other manufacturing sectors.

This report begins to look more like a transitional report. The clear (but slow) erosion of manufacturing is not a good development. The service sector remains solid-to-strong, but it does not have a clear trend. Meanwhile there seems to be little upside to the outlook and a lot of risk in the environment. It’s a tough time to be an optimist.

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