Rates of Ezone and U.S. Contraction More Similar in March Than February

April 3, 2009

  U.S. Ezone   U.S. Ezone   Sum of
  Services Services Spread Mf’g Mf’g Spread Spreads
Feb 2008 49.7 52.3 -2.6 48.8 52.3 -3.5 -6.1
March 49.9 51.6 -1.7 49.0 52.0 -3.0 -4.7
April 51.9 52.0 -0.1 48.6 50.7 -2.1 -2.2
May 51.2 50.6 +0.6 49.3 50.6 -1.3 -0.7
June 48.8 49.1 -0.3 49.5 49.2 +0.3 0.0
July 49.6 48.3 +1.3 49.5 47.4 +2.1 +3.4
August 50.4 48.5 +1.9 49.3 47.6 +2.1 +4.0
Sept 50.0 48.4 1.6 43.4 45.0 -1.6 0.0
October 44.6 45.8 -1.2 38.7 41.1 -2.4 -3.6
November 37.4 42.5 -5.1 36.6 35.6 +1.0 -4.1
December 40.1 42.1 -2.0 32.9 33.9 -1.0 -3.0
Jan 2009 42.9 42.2 +0.7 35.6 34.4 +1.2 +1.9
Feb 41.6 39.2 +2.4 35.8 33.5 +2.3 +4.7
March 40.8 40.9 -0.1 36.3 33.9 +2.4 +2.3


The purchasing managers surveys, which get released on the same day in the euro area and the United States, provide one of the best timely ways to gauge those regions’ relative rates of contraction through this synchronized recession.  Many analysts contend the United States should recover sooner and more quickly than Euroland because of the stronger policy counter-measures introduced by Washington.  An early sign of the correctness of this hypothesis would be seen in the spreads between the PMI indices.  The above table subtracts the euro zone readings from the U.S. readings, so that increases in the spreads imply more pronounced slowdowns in the U.S. than Euroland.  When the readings climb above 50, the signal shifts from contraction to expansion, thus conveying the coming onset of recovery within a couple of months.  Conventional wisdom expects the U.S. readings to poke above 50 before Euroland readings.  One final point is that the service PMI’s are more meaningful than the manufacturing PMI’s because services represent somewhat more than twice as much a share of overall activity as does manufacturing.

PMI data so far do not support the optimistic view of the U.S. outlook vis-a-vis Europe’s prognosis.  W
e see instead that the spread has waxed and waned but without bestowing an enduringly clear advantage on either economy.  In the most recent month of data released for services this morning, the spread swung to -0.1%, connoting an infinitesimal advantage for Europe.  In manufacturing, the U.S. retains an advantage, but both U.S. and Euroland scores remain so deeply mired in the low 30’s that it is far too premature to look ahead to a recovery.  The final column adds the two spreads, overstating the importance of manufacturing and understating that of services.  Consequently, the 2.3-point differential shown for March overstates America’s comparative superiority, and its drop from +4.7 in February understates the true narrowing of the gap between the U.S. and Euroland paths.

The G-20 statement of joint purpose released yesterday in London represented more significant concessions by U.S. officials than other attendees.  Washington compromised on tighter regulations than it wanted and failed to get China to agree to appreciate the yuan or France and Germany to promise additional action on the matter of fiscal stimulus.  European officials maintain that their more compassionate social safety net creates much more automatic fiscal support than found in the United States, forcing Washington to fine tune stimulus on an ad hoc basis.  In Europe, new legislation is not needed to produce a similar counter-cyclical boost.  They have a point. 

The bigger linkage in rating prospects in the two regions, however, does not involve the matter of policy response so much as the different natures of their economic structures.  Euroland is excessively reliant on trade for growth and therefore depends on the revival of world growth for its own economic recovery to take root.  Greater labor market mobility in the United States also provides for a more compressed, albeit violent, process of creative destruction in the United States.  The U.S. economy has a greater intrinsic propensity to make the needed structural changes to get though the recession and on to a new recovery.  Both of these difference suggest that recovery should begin first on the Western side of the Atlantic, but it is possible for Europe to piggy-back on America’s recovery almost simultaneously.  Trade-dependent Europe has more to lose, however, if protectionism spreads during 2009.

Copyright 2009 Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

Tags: ,


Comments are closed.