Economy in Brief

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.

European car registrations in April rose 11.8% after falling by 8.8% in March. Looking at smoothed data with percent changes calculated from three-month moving averages, the April gain was 0.3% after a March gain of 0.5%. This simply means that in smooth terms gains in auto sales/registrations continue and haven't changed speeds by very much.

Accounting by country, it was a strong monthly gain in April in Germany with car registrations up to 8.4%; Italian registrations were up by 3.3% in April. Registrations fell by an outsized 8.8% in the United Kingdom; they fell by 1.8% in France, and by 0.5% in Spain. The country level data represent reversals month-to-month for all countries except the U.K. In other words, countries with sales gains in April had declines in March and countries with declines in April had increases in March. The exception is the U.K. that had substantial declines in both March and in April; however, the U.K. is also coming off of a huge gain in February that by itself is nearly as big as the two months consolidated drops in April and March; the U.K. February gain is by far a much larger than the increase in registrations seen in any other European country in the table in that month. The month-to-month declines for sales for two months running in the U.K. is not surprising; the U.K. economy has been struggling. However, when we see that those two months’ drops compared to such a strong gain in February the overall signal is muddied and muted.

Sequential annualized sales for all of Europe show 12-month gains at 13.9%, compared to a 4.2% annual rate gain over six months, and a 3.6% annual rate gain over three months. There's a sharp slowdown from the 12-month pace compared to three and six months. Surprisingly, there's more variability in the smooth data that show European registrations up 6.1% based on three-month averages over 12 months but a growth rate of -6.9% over 6 months based on smoothed data, and a growth rate of 6.1% over 3 months based on smoothed data.

Country level sequential data only show relative clarity for Italy and the United Kingdom. U.K. 12-month growth rate is 1.8% while the three-month and six-month growth rates are on the order of -20% annualized. Germany and Spain both show increases on all horizons. For Germany, the year over year growth rate is 12.9%, pretty similar to the three-month growth rate; however, there's a jump in the growth rate that doubles over six months and then settles back down. For Spain, the 12-month growth rate is 22.5%; it edges down slightly to 18.2% at an annual rate over six months and then jumps sharply to a 47.1% annual rate over three months. Germany and Spain clearly have the strongest registration profile. The U.K. clearly has the weakest while France and Italy are in between case; both France and Italy show gains over 12 months and declines in registrations over six months, but over three-months France shows an increase in registrations at a 19% annual rate while Italy shows a decline at a -14% pace. Italy shows a decelerating pace of registrations from 8.2% over 12 months to -13.2% over 6 months, the decline gains pace to -14.2% over 3 months.