S&P PMIs for EMU in Gradual Upswing -Abating This Month

The S&P flash PMIs for the composite manufacturing and services gauges for seven early-reporter units (6 countries) including the European Monetary Union show more weakening conditions than strengthening conditions in May. Looked at by reporting unit, manufacturing has improved in every single reporting unit on a month-to-month basis; however, in six of the seven units, the services sector was weaker and since the services sector is having a bigger impact on the composite for these six reporters, the composite, and the services index both weakened. The U.S. is the exceptional reporter that had a strengthening in all three gauges: the composite, manufacturing, and services.

Part of this reflects a reversal from April when fourteen of these gauges improved and seven deteriorated (three gauges per reporting unit across seven reporting units). And in May there were only 5 gauges that were weaker compared to 16 that were stronger. The monthly data had been showing more improvements until May.

Quarterly data repeat this process with five of these gauges weaker over three months compared to 16 stronger. This is a reversal of the six-month pattern in which 16 gauges were weaker and only five were stronger- and that's the same condition that prevails over 12 months. So, we find ourselves in a transitional 3-month period where things are getting stronger; however, in May at the end of this string, we find a reversion to previous conditions of having more weakness than strength. This simply means that we must keep a close eye on these events to see if we're seeing a slowdown in the recovery process or a termination of the recovery process and a reversion to weakness.

The percentile standings tell us where the current indexes stand relative to their position over the last 4 1/2 years. On this basis, the percentile standings executed on the queue standing basis show 10 of the 21 gauges have standings below the 50% mark which puts them below their historic median for the last 4 1/2 years. However, weakness is concentrated in France and the United Kingdom, two countries that have all sectors below the 50-percentile mark. Japan is the only exception to have all gauges above the 50-percentile mark. The most general observation is that the composite index and the service sector index have percentile standings in their 60th percentiles, with manufacturing at some standing level below its 50th percentile usually around its 40th percentile or lower. The unweighted average standing for the group has the composite with the 59-percentile standing, the average with the 38.6 percentile standing, and services at a 61.4 percentile standing. Excluding the U.S. from this unweighted average, we find little changed with the average at 59.1% for the composite, at 38.7% for manufacturing and at 61.3% for services. The U.S. has standing statistics that are just about at the average for this group.

The chart shows that recent momentum has been improving at least in the European Monetary Area. However, the current month shows a set-back and the most recent three months show improvement after six-month and 12-month averages that were considerably weaker. The question on the table is whether this improvement is continuing or whether it's slowing down or running out of gas. Central banks had been raising rates during this period, and - more recently- have stopped. And they have not for the most part shifted to a policy of easing although several of them seemed to be poised to take that next step. The next step the central banks take is going to depend a lot upon how inflation performs and inflation performance, which had been positive and constructive during most of this period, has since slowed, or begun to make some small reversals. That leaves a question mark about what central bank policy will be and that in turn leaves a question mark about how growth will unfold.