Economy in Brief

The IFO index in February produced improvements for all environmental assessments: climate, current conditions, and expectations. Conditions in Germany improved even if only slightly across all four of five industry groups- all except services. Improving were manufacturing, construction, wholesale, and retail. Each improved for climate, for current conditions, and for expectations. However, in each case conditions worsened for services climate saw its services diffusion reading fall to -4.3 in February from -2.2 in January, current conditions saw the services current conditions reading fall to 10 from 13.9, and expectations saw the services expectations conditions reading fall to -17.7 from -17.

It's unusual to see something like this happen, especially with two dedicated readings for services subsectors, wholesaling and for retailing, improving in each of the three categories of climate, current conditions, and expectations. However, conditions have been weak in Germany for quite a long time and the services sector has been the only sector with positive current conditions readings for some time; it may be that after all this pulling that the services sector has done, it has run out of gas and now the pulling in the opposite direction by manufacturing, construction, wholesaling, and retailing is taking its toll on services.

The rankings continue to produce low readings and although the diffusion readings for services are the highest in each category services, looked at on a percentile standing basis on data back the late-1991, reveals the sector to have the weakest climate ranking; It has the 2nd weakest current conditions ranking, and it has the weakest expectations ranking among all industry groups.

As always, it's hard to tell how this is going to play out. Manufacturing tends to be the cutting edge; it is the sector with volatility that tends to move down the soonest when the economy is weakening and move up the fastest when the economy is strengthening. But, right now, there's not a whole lot of trend going on for any of the sectors. The chart at the top shows that there has been stability for most of the sectors with the exception of services where the chart plots a gradual erosion in progress.

Among the IFO reading, the only reading that stands above its median reading on data back to 1991 is the construction sector with a 59.5 percentile standing for current conditions. Any reading above the 50th percentile is above its median. Retailing is one of the sectors that comes close to doing this, also for current conditions, with a reading at its 48.2 percentile, closing in on that neutral 50% mark.

Conditions in Germany remain touch and go; there remains political stability in the country where national elections are pending. In the euro area, there has been a lot of political reversals for long entrenched national parties. Europe displays a good deal of uncertainty particularly regarding recent U.S. policies that have pressured Europe over some of its past conduct and where a new system of support for Ukraine is in the offing. The times they are a changin.’

PMI gauges for the European Monetary Union show that the manufacturing sector that has been very weak is gaining some strength while the services sector that has generally had higher PMI values is eroding- it, in fact, has weakened for two months in a row. The aggregate statistics are now showing relatively weak standings for both manufacturing and services. Comparing the reporting units in the table, we see that among the eight reporters four of them have stronger queue percentile standings for manufacturing and four of them have relatively stronger queue percentile standings for services. The unweighted average of these shows the manufacturing average at a 40.8 percentile standing with services at a 42.1 percentile standing. Both of them were standings below the 50% mark meaning that for both of them performances below their median performance for the last four-plus years.

Monthly patterns The monthly data show, again I'm looking at the unweighted average of the eight-reporters in the table, that the composite reading has only very gradually deteriorated from 51.5 in December, to 51.4 in January, to 51.2 in February. This is a lot more like stasis than it is like weakening. The data showed that manufacturing has been creeping higher from a diffusion rating of 47.6 on an unweighted basis in December to 49.1 in January and 49.2 in February that contrast with services. For the December reading, services log a reading of 52.8, that gives way to 52.0 in January, and to 51.7 in February. Manufacturing is firming and services are easing although in percentile standing terms there's very little difference between the relative standings of the two sectors; however in diffusion terms services continue to be the sector above 50 which means that activity is expanding in services where manufacturing is closing in on 50 but doing it from below, indicating that the manufacturing sector is still contracting but contracting and ever slower pace. And, of course, the services sector is the job creating sector.

The beat goes on…faint as it is None of these observations are particularly encouraging or particularly depressing except that there has generally been economic underperformance and as far as that's concerned the beat goes on. There is fairly broad improvement going on in Australia, Japan, and Germany, but otherwise conditions are quite mixed on a monthly basis.