Manufacturing: U.S. and Euroland PMI's Cross Over Again

October 1, 2008

Early today, Euroland reported a downward revision of its September PMI-manufacturing index to 45.0 from a preliminary estimate of 45.3 and an August reading of 47.6.  In the United States, the Institute of Supply Management just announced a much bigger 6.4 plunge in the U.S. PMI-mf’g index to 43.5.  Consequently, the straight algebraic differential (U.S. minus Euroland) between the two trends crossed back into negative territory following three positive readings in a row.  The spread had also been negative during the first five months of 2008.  One cited factor for the drop in EUR/USD after peaking in mid-July at $1.6038 had been perceptions that the Euroland economy will continue to perform more weakly than the U.S. economy.  These reports cast doubt on that assumption and on the further inference that the differential between the Fed’s and ECB’s benchmark policy interest rates will become more advantageous to dollar investments in the future.

Mf’g PMI’s United States Euroland Spread
January 50.7 52.8 -2.1
February 48.3 52.3 -4.0
March 48.6 52.0 -3.4
April 48.6 50.7 -2.1
May 49.6 50.6 -1.0
June 50.2 49.2 +1.0
July 50.0 47.4 +2.6
August 49.9 47.6 +2.3
September 43.5 45.0 -1.5


Sub-50 PMI scores signify contracting activity.  The further below 50, the faster activity is slowing.   With four sub-50 observations in a row, manufacturing in the euro area has quite apparently entered a recession.  The United States had straddled the expansion-contraction threshold for four straight months before diving sharply in September.  More data are needed to determine if September’s drop constitutes an erratic move or a true turn for the worse.  Most likely, it’s the latter.  Among key sub-components of these reports, Euroland and the United States each recorded sub-50 readings for production, new orders, and jobs but above-50, albeit reduced, scores for prices.  The production spread (U.S. minus Euroland) fell 7.8 points to -3.3.  The orders spread declined 6.6 points to -2.9, and the employment differential dropped 6.1 points to -5.2 in September from August.  The price spread swung from +19.5 in August to -1.4 in September, mainly as a result of a 23.5-point plunge in the U.S. prices index to 53.5.  This report provides more ammunition for both the Fed and ECB to consider a coordinated rate reduction.  October will be a busy month for central bank policymaking.  The ECB meets tomorrow and has not hinted that it will reduce rates this month.  The Reserve Bank of Australia meets October 8th, and the Bank of England and Bank of Japan announce rates on the 9th.  The Bank of Canada’s turn comes on the 21st, followed by the Reserve Bank of New Zealand on the 23rd.  The FOMC announces on the 29th, the same day as the Bank of Japan’s second policy meeting of the month in which semi-annual Japanese growth and inflation projections will be released.

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