Flash PMIs for April Are Mixed

The S&P Global flash PMIs for EMU in April advanced to 55.8 from a finalized 54.9 in March. The manufacturing reading slipped lower to 55.3 on a flash basis compared to its finalized March value of 56.5. The flash services reading rises to 57.7 in April compared to a finalized 55.6 in March. The service sector improves on the month while manufacturing steps back. Due to the weight of services, the overall composite index improves.

These readings are for April and by now they represent about two months of time that has passed since the Russia-Ukraine war broke out. The impact on the PMIs over this period is mixed. EMU manufacturing flash is at 55.3 in April compared to 58.2 in February; the services flash at 57.7 in April compares to 55.5 in February. Manufacturing is weaker and services is stronger in line with their respective month-to-month change as well. Of course, two months is not much time to pass, and the sanctions were not imposed exactly from the outset of the conflict and so we should be wary that there may be more repercussions to come in the months ahead.

In the discussion that follows, it will be understood that any reference to April data refers to a flash estimate and any estimate to historic data refers to finalized estimates.

For Germany, the results are slightly different. The composite is weaker month-to-month along with manufacturing while services are stronger month-to-month. Comparing April to February for Germany, the composite is lower, manufacturing is lower, but services are stronger.

For France, the composite is stronger month-to-month along with both manufacturing and services. Compared to their February values, manufacturing is weaker, but services are stronger and the composite is stronger overall.

For the U.K., month-to-month the composite and services are weaker while manufacturing is stronger. Compared to February, both sectors as well as the composite are weaker in the U.K.

In Japan, the composite is slightly stronger, and services are slightly stronger ticking up to a diffusion value of 50.5 showing expansion which is a reversal from earlier months. Manufacturing, however, is weaker month-to-month in Japan. Compared to February, all the Japanese readings are stronger in April.

The U.S. shows mixed performance with the composite weaker month-to-month, manufacturing stronger and services showing significant weakness compared to March. Comparing the April values to February, the U.S. composite is weaker and services are weaker, but the manufacturing sector is stronger.

The S&P Global PMIs show mixed patterns for broader changes as well. Over three months, all the EMU readings are weaker; the same is true for the U.S. However, for Germany, the composite, the manufacturing and the service sectors all are stronger over three months; France, the U.K., and Japan show mixed conditions. Over six months, the European Monetary Union shows the composite, the manufacturing sector, and the service sector are weaker. Germany, the U.S. and the U.K. show that same result. In contrast, Japan shows three stronger readings. France shows weakness except for services that are stronger over six months.

Over 12 months, all sectors and all these reporting units have stronger readings.

The queue (or rank) standings show some significant differences across countries and areas. The European Monetary Union has a composite ranking in its 80th percentile, France is at its 94th percentile; the U.K. is at its 82nd percentile. However, Germany has only a 64-percentile ranking. The U.S. is only at its 56th percentile with Japan in its 66th percentile standing. For France, the composite index is very strong; for the U.K. and EMU there's significant strength; however, elsewhere, composite indexes show only moderate firmness.

Manufacturing is in its 80th percentile or better in the U.S., Japan, and France. The standing is in the 60th percentile for the European Monetary Union and for the U.K. For Germany, the standing for manufacturing is only in its 47th percentile, below its historic median for this period.

However, it is the service sectors that show the most disparity. In the European Monetary Union, the services sector has a 92-percentile standing; the same standing holds for Germany. For France, the standing is even higher at the 98th percentile, marking an all time high for this period. In the U.K., the service sector has an 84-percentile standing, but in Japan, the service sector only has a 52-percentile standing. In U.S., the service sector has an anemic 45-percentile standing, below its historic median.

How to reconcile these developments There's been a lot of talk about disruption to supply chains and when we talk about that we think mostly of manufacturing and these data suggest that the services sector has weathered this period better than manufacturing. After war broke out there have been differences in the impact on the manufacturing vs. services sectors across countries. But overall manufacturing has been hit hard, dropping by a cumulative 7.2 points over two months for the reported across all the reporters in the table. Meanwhile, over two months the service sectors have improved by a cumulative 10 points. Setting aside the magnitudes of the changes, by count, two of six reporters show manufacturing sector improvements compared to four of six showing service sector improvement. Moreover, the service sectors average a higher standing than the manufacturing sector standings and that is even more pronounced when the U.S. is removed. The U.S. has the atypical response pattern with its service sector weaker over two months and manufacturing stronger.

In any event the data suggest that we have something to keep an eye on here because growth is looking a little bit more uneven than it has been looking and central banks are embarked on programs to head off inflation which continues to be high, and which has continued to show not just firmness but also acceleration.

More economists are coming to talk about recession. In the U.S., the central bank has gone out of its way to find episodes in the past when it raised rates but did not cause recession. However, there has never been an inflation problem like this that globally finds nearly all central banks behind in attacking the problem at the same time. A ‘happy ending’ may be a ‘possibility,’ but it is not the odds-on bet. As a reminder, Larry Summers, looking at the U.S. situation in the Post-War period, has pointed out that whenever unemployment has gone below four percent and inflation above 4% at the same time a recession has occurred within two years.