Economy in Brief

The European monetary union’s index of sentiment created by the European Commission rose sharply in October to its highest level since April 2023. There were improvements in the three of the five sector indexes reported with only construction and services unchanged in October relative to their September values.

Despite the nice step-up in the indexes in October, they are still at relatively low values. Only two sectors, construction and retailing, have readings above their 50th percentiles with construction at a 77.5 percentile standing and retailing at a 51.5 percentile standing. The service sector has a low 27.5 percentile standing, consumer confidence is at a 24.3 percentile standing, and the industrial sector is at a 35.9 percentile. Data are ranked over observations back to 1990, where feasible.

‘Better’ is not always ‘good’ Clearly the euro area is not performing particularly well at this time. The rankings data make that especially clear. The service sector and the industrial sector are substantially below their historic medians. The median occurs at a queue (or rank) standing at the 50-percentile mark. Consumer confidence is in the lower 25-percentile of its range for this period; services are in their 27th percentile – a low ranking for such an important job creating sector.

The largest have the best October showing The four largest economies in the euro area lead the way in the month and on the broader trip to mediocrity. Germany, France, and Italy each rise by one percentage point or more in October. More broadly, Italy and Spain are the only two ‘large economies’ with percentile standings above their respective 50th percentiles: Spain is at a 55.3 percentile standing, Italy at a 50.9 percentile standing. The largest two economies in the monetary union, Germany and France, respectively, have standings at the 19th percentile for Germany in the 33rd percentile for France.

Granular performance of the Euro Area In October only one large economy backtracked compared to September and that's Spain; its hard decline of 0.9% came after its index rose by 2.9% in September. Among the remaining 14 economies, seven of them showed declines in October and seven of them showed increases. The pickup and performance for the monetary union in October is substantially on the back of the larger economies that are doing better while these smaller monetary union members are clearly mixed.

Standings In terms of standings, the smaller monetary union economies show 5 of 14 with standings above their 50th percentile. These are Portugal at 51.5%, Cyprus at 56.2%, Lithuania at 64.4%, Greece at 71.1%, and Malta at a strong 89.1%.

Summing up It is a good month statistically for the euro area. However, the gains are not widespread, and the sector performance is still mixed. But this is the strongest level for the EU sentiment index since April 2023, and that is something.

An upswing appears to be underway with both manufacturing and services readings improving. The S&P PMI data for October covered eight different reporters, five of which improved in October compared to September. September had been an extremely weak set of readings; out of the 24 different categories (eight countries with three readings each), there were only five that improved in September compared to August. August had been a strong month. The survey clearly is showing some volatility over these past few months; however, in October we're seeing a fairly broad-based increase, with only nine of the 24 detailed categories that assess the composite, manufacturing, and services showing weaker performance compared to September. And of those comparisons across eight countries, 19 sectors and composite indexes had been weaker month-to-month in September compared to August.

Over three months the averaged composites are stronger compared to six-month average. Among all the reporters, only three of the 24 sectors and composite readings show weakness in three-months compared to six-months. Each of those weakening readings is for manufacturing. They involve weaker manufacturing in Japan, in Australia, and in the United States. Ten of 24 sectors and composite readings weaken over six months compared to 12-months. Only 7 detailed readings out of 24 weaken over 12 months compared to 12-months before based on comparing averages.

Queue percentile standings take the October values and rank them in a queue of data back to January 2021 expressing the standing in October as a percentile in that queue of readings. The average percentile standing for the composite indexes in October is at 55.6%. The average manufacturing sector’s queue standing at 52.2% while the average services rating is at 54.1%. In October, all of the readings averaged across the 8 reporters are above their medians for the period back to January 2021 compared across monthly data. That's not an exceptionally strong performance, but it's a solid performance. Among the reporting countries, only Japan, the United Kingdom, and France have composite standings that are below their medians (that is, they have ranked standings for their respective composites below their 50th percentile).

The average standing across the 8 reporters in October generally shows an improvement from September; September was weaker than August. With that, October values, while higher month-to-month, were lower than they were in August. For example, the overall composite in October moved up to 52.8 from 52.5 in September, but September had fallen from 53.9. Values in October are still below values in August. The same thing is true of services and manufacturing.

The average sequential data for 3-months, 6-months and 12-months, however, show steady improvement with composite readings rising from 51.8 for 12-months to 51.9 over six months and to 52.6 over three months. These calculations are performed only on hard data and are up to date through September. The October monthly reading for the composite, for manufacturing and for services are stronger for each of these readings in October compared to three-month averaged values ended in September paving the way for continued improvement ahead.

Overall, the sense of improvement here is slow. Compared to January 2021, the October readings are stronger for composite and for services but weaker for manufacturing; that sector is taking longer to recover. Still, recovery seems to be in gear; if that remains the case, central banks may have to rethink their programs of ongoing interest rate cuts.