Convergence Around the Atlantic in PMI Scores

May 6, 2008

The view that the U.S. economy may not be as weak as thought and that Euroland may be in worse shape than heretofore assumed has supported the dollar lately. April PMI scores corroborate the new thinking. The U.S. manufacturing PMI was unchanged at 48.6, while its Ezone counterpart fell by 1.3 from 52.0 to 50.7. The first difference between these readings (U.S. minus Euroland) narrowed to -2.1 from -3.4 in March and -4.0 in Feb. In comparisons of the service-sector PMI’s, which embody a much greater cross-section of activity than manufacturing, the U.S. index jumped 3.0 points to 52.0, much more than 0.4-point rise of Euroland’s score to 52.0. The zero U.S./Ezone spread in April represents significant improvement from -2.6 points in March, -3.0 in February, and -4.6 in January.

The table below displays the manufacturing and service PMI readings in April of the four largest Euroland members and the changes in each score from the previous month.

Germany France Italy Spain
Mf’g 53.6, -1.5 51.1, -0.8 48.2, -1.2 45.2, -1.2
Services 54.9, +3.1 52.8, -4.5 49.8, +1.0 42.5, +1.6

Italy and Spain have sub-50 readings in both sectors, suggesting a recession especially in Spain, where growth had averaged 3.7% per annum in the ten years to 2007. Relatively high inflation in these economies is amplifying the drag from euro appreciation, which is not surprising. But I am worried most by the unexpected French results, where the drop in the services PMI is pronounced and at variance to the improvement in the other three economies. Only Germany had decent results in April, but more weakness is to be expected during coming months in Euroland’s largest economy in response to continuing soft personal spending and the squeeze of a high euro, expensive oil, and soft consumer sentiment.

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