Ezone and U.S. PMI Scores Similar in June

July 3, 2008

The service-sector PMI’s for Euroland and the United States were each slightly below 50, connoting mild contraction.  A bigger deterioration of conditions between May and June occurred in the United States than in the euro area, but the United States had a higher level ,49.8, than Europe’s 49.1.  The 0.8 difference was similar to the 1.0 point spread with a U.S. advantage seen in their respective factory sector PMI readings.  In services, new orders fell by 1.9 points in Euroland to 48.5 and by a larger 5.0 points in the United States to a 48.6 reading.  The table below documents trends over the past year in the U.S. services PMI, Euroland’s services PMI, the first difference of those scores (U.S. minus Ezone), and the algebraic sum of that spread and its sister manufacturing sector spread. PMI comparative trends, which shifted in the U.S. favor last quarter, are a major factor why some analysts think the euro has crested and faces a downward correction.

The PMI’s are not a perfect gauge for comparison.  As Trichet explained in today’s press conference, activity in Euroland was unrepresentatively strong in 1Q because of special factors like a mild winter, so second-quarter weakness in part reflects a technical reaction from the first quarter’s distortion. In other respects such as labor market trends, Euroland outshines America.  U.S. jobs contracted by 73K per month in 1H08 in contrast to monthly average advances of 76K in 2H07 and 107K in 1H07.  German unemployment fell by 38K last month and at a rate of 44.7K per month over the last 12 months, equivalent to a drop to 7.8% from 9.1%.  Finally, relative growth prospects are not the only determinant of foreign exchange rates.  America’s macroeconomic imbalances are much more severe than Euroland’s.  I would not bet heavily that today’s ECB rate hike will be the last tightening of this cycle nor that the Fed will be lifting U.S. rates with jobs still contracting.  These conditions happened under Former Fed Chairman Paul Volcker, but he had more political cover than Ben Bernanke possesses now.  Inflation is a more widely shared global problem than weak growth.  If in the future a point is reached that compels the Fed to raise rates, conditions in the euro area will be tempting ECB officials to do the same.


  U.S. Services Ezone Services First Diff Sum of 2 Spreads
June 2007 59.7 58.3 +1.4 -0.8
July 55.9 58.3 -2.4 -5.0
August 56.3 58.0 -1.7 -4.8
September 55.7 54.2 +1.5 -1.2
October 55.5 55.8 -0.3 -1.4
November 54.6 54.1 +0.5 -2.3
December 54.4 53.1 +1.3 -2.9
January 41.9 50.6 -8.7 -10.8
February 50.8 52.3 -1.5 -5.5
March 52.2 51.6 +0.6 -2.8
April 50.9 52.0 -1.1 -3.2
May 53.6 50.6 +3.0 +2.0
June 49.9 49.1 +0.8 +1.8



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