EU Indices largely improve in May.

Progress, yes...but not much

The indices of sentiment and confidence in the EU area, for the Monetary Union sub-set, as well as for their key individual members, showed surprising resilience and strength in May. The overall EU index rose as the sentiment index for 10 of 11 key EU members improved month-to-month. This improvement followed a month in which seven of the same members reported month-to-month declines. In the previous month of March, 5 of them had reported declines.

Is it always good to remind people that one month does not determine a trend, however, the rebound of these sentiment indices for 10 out of 11 key countries as well as for the EU as a whole and for the Monetary Union is a good start to something better.

Still, once we evaluate where things sit, the answer is that the readings for the economic union the monetary union and these key 11 countries are still unfailingly week - even after the rebound in May.

We evaluate the standing of the respective EU diffusion metrics in May by placing the current reading for each region or country in an ordered queue of its historic data then expressing that standing is a percentile positioning in the queue. For example, the EU index is in the 12 percentile of its queue. That means it is weaker historically than its current level only 12% of the time. The EMU metric for sentiment is in the 11.4 percentile of its queue, its weaker only 11.4% of the time. Of course, the ranking for the union is a weighted average of its various economies but with the overall index being weighted separately. Right now, for example, it appears that the EMU index is weaker than most of the members that carry the largest weight in the euro-Zone itself. How could that happen? The answer is that it's not just the weakness of the components in the EMU index that gives it its ranking but also the coincidence of all of that weakness happening together and it's the coincident occurrence of weakness that is responsible for the lower standing of the region than for most of its members

The weakest queue standing among these key 10 EMU members is from France which is in the 9.3 percentile of its queue followed by Spain in the 10.2 percentile of its queue. After those two relatively large EMU members the percentile standings move up to 12.9 for Belgium, to 14.1 for the Netherlands, to 15.0 for Portugal, and to 16.8 for Austria and so on. Germany, of course, is that the top of the food chain with the 35.6 percentile standing but note this is still pretty close to the bottom third of its range and it's the best of the lot and Germany is the largest economy in EMU.

The Industrial sector
The industrial sector improved in the monetary union to a reading of -13 from reading of -14 (note that the values in the table by industry sector are for all of the EU not for the EMU). The queue standings for industry find Germany at the strongest reading at 40.7 percentile, Italy at the 13.8 percentile, France at the 18.6 percentile all expressed as percentile standings of their their respective queues. We also look at them in terms of changes of the last three months the German reading has deteriorated by four points, the French reading has deteriorated by three points, the Italian reading is unchanged, and the Spanish reading is down by one point. The overall EMU reading is weaker by two points. So the improvement that were seeing in industrial sector is mostly from very weak levels in April as we are still for the most part below the levels we saw in February. This is a common them for most categories this month...a minor one month bounce.

Consumer Confidence
Consumer confidence in EMU continues to be uniformly low. In the EMU region it's in the bottom 15 percentile of its queue standing. There was no improvement in consumer confidence month-to-month, although April had showed improvement from March which was even with its value in February. Unemployment expectations have been steadily dropping they are still quite high in the top 22nd percent of their historic queue (expectations are higher only 22% of the time). And by country Germany continues to be the strongest with a decent consumer rating in the 64th percentile of its historic queue, nearly a top one-third reading. The EU's UK has a 20%-of-queue rating, while France's standing is in the bottom 12% of its queue and Spain is in the bottom 11.6% of its queue.

Retailing: retail therapy?
Retailing improved in the month in EMU to a -17 net reading from -18 reading in April but it is still below its -16 reading for February. The queue standing for the May reading of -17 is in the 17 percentile of its historic queue, a very weak standing. Germany has the highest queue standing on this metric in the 66.8 percentile or top one-third reading. the UK moves up to a more respectable 42nd percentile standing with Greece (Greece!) at a 34th percentile standing. Spain is at a 29th percentile and Italy at about 30th percentile all of these are relatively better than what we see for other components although clearly (except for the UK and Germany) all of these are still bottom one third of their queue standings which we have to regard as very weak. We do however see strong improvements from their February levels: Greece is at a -15 compared with a -33 raw-reading in February, Portugal which is at a -15 reading compared with a -20 raw reading in February, and even Italy, at a -22 compared with a -28 raw- reading in February. We are seeing improvement in retailing in the countries that have been the most hard-hit by austerity.

Services sector
The services metric for EMU improved to -9 in May from -11 in April that -9 reading stands at its February level as well. There were month-to-month improvements in Germany, in Italy, and in Portugal; a sharp improvement in the UK and Greece. But the ranking of the services index for EMU in May is in the lower 12 percentile of its historic queue. Generally the services readings by country are slightly better than for other components, except for retailing. Interestingly, the UK has the highest percentile standing in the 33.5th percentile compared to Germany which is second at the 32nd percentile Greece is in the 29th percentile, Spain in the 20th percentile, Italy in the 13th percentile, Portugal in the 10th percentile and France, which was unchanged on the month stands in the lower 5th percentile of its historic queue, an extremely weak reading.

Construction
The construction sector in EMU ranks in the 17 percentile of its historic queue unlike the other measures it fell in May to a -34 reading to a -32 reading and it's below its February reading. By country Germany is exceptionally strong in the top 1% of its historic queue for the construction sector! Italy's reading is basically tied with the UK in the 37th percentile of their respective queues. France's reading stands in the 28th percentile of its queue. And Spain that has had an absolute construction disaster has fallen below 1% of its historic queue for the construction sector.

Employment expectations...generally
Employment expectations up-and-down the Zone's sectors whether measured in the current environment or for expectations - cut and presented many different ways - are generally ranking from the 30th to the 13th percentile of their respective historic queues. The exception is for industry where employment expectations are in the 43rd percentile which is still not a good reading but it's by far the best of the lot. From the consumer sentiment report unemployment expectations are, as mentioned earlier, in the top 22% of their historic queue.

Summing up
The picture for EMU this month is of a region that is slightly better than it was in the last month or two but still generally worse than it was three months ago. While, there is a rather broad-based bounce recorded in May, we need to be careful about getting too carried away about what that signal really means. It certainly is too soon to say we turned the corner and to try to extrapolate trends. If you look at the chart at the top and try to block out particular calculations for particular months, most of the lines on the chart appear to have moved up from their lowest points of this cycle. For some, like France, it's a one month move. For most of the rest it's a multi month move but on a very shallow gradient. That shallow gradient means that the signal is not strong. It also indicates ongoing vulnerability.

Away from the sheer numbers we continue to hear divisive language out of leaders from the various countries in the monetary union. France, Spain, Poland, Portugal, the Netherlands and Slovenia are all being given more time to complete their austerity plans by the EU. We can be hopeful that the worst of this might be behind us, but it would be foolish to expect to see improvement at anything other than a very slow pace at least based on the momentum that we see in this report.