Falling Euro Reflected in U.S. and Ezone Factory PMI's Results

November 3, 2008

The first difference between the United States and Euroland had a somewhat larger negative sign in October than in September. In the three months since July, the month with the strongest average euro value against the dollar, the factory spread has become more favorable for Euroland by 4.8 points, swinging from plus 2.6 to minus 2.2. The U.S. reading in October of 38.9 was the lowest since September 1982, two months before a severe recession ended. Euroland’s 41.1 score was the lowest in the 11 years that such a survey has been conducted. Both regions are now experiencing severe contractions in manufacturing.

Among key components of the survey, the differential for new orders became more disadvantageous for the United States, widening to -4.0 points from -3.0, and that for production grew to -5.7 from -3.3 points in September. The U.S. labor market continues to weaken more rapidly than Euroland’s, with a jobs spread of -9.8 points, nearly twice the width of September’s -5.2 spread. But price pressures receded much more quickly in the United States. Whereas the rising dollar lifted Euroland competitiveness vis-a-vis the United States and thus pushed the overall PMI differential back into negative territory, exchange rate appreciation contained U.S. import price inflation. The U.S. price component sank from an above-50 reading of 53.5 in September to 37.0 in October. In contrast, the euro area output price component edged up 0.3 points to 51.6. The ECB is nonetheless likely to cut its key rates by another 50 basis points this Thursday, deferring to reduced medium-term price risks. The table below, the right-most column shows monthly averages for the EUR/USD exchange rate.

Mf’g PMI’s United States Euroland Spread EUR/USD
Nov 2007 50.0 52.8 -2.8 $1.468
Dec 2007 48.4 52.6 -4.2 1.455
January 50.7 52.8 -2.1 1.472
February 48.3 52.3 -4.0 1.475
March 48.6 52.0 -3.4 1.553
April 48.6 50.7 -2.1 1.574
May 49.6 50.6 -1.0 1.555
June 50.2 49.2 +1.0 1.557
July 50.0 47.4 +2.6 1.577
August 49.9 47.6 +2.3 1.497
September 43.5 45.0 -1.5 1.437
October 38.9 41.1 -2.2 1.331

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