Widest Differential Between U.S. and Euroland Manufacturing PMIs in Over Two Years
November 2, 2009
The U.S. manufacturing purchasing managers index jumped 3.1 points last month, about eight times more than projected and to its best reading since July 2007. The increase was also more than twice as big a point gain as experienced by the euro area manufacturing PMI. As a consequence, the spread between the two indices widened to 5.0 points, most in over two years. Increasingly more advantageous U.S. conditions are associated with an appreciating euro, which had an average value in October of $1.489, almost 12% stronger than a year before. Since October 2008, the U.S. PMI has risen 17.0 points, the Euroland index has climbed 9.6 points, and the differential between the two has swung from minus 2.4 to +5.0. Note that a reading above 50 implies expanding activity, while a score of under 50 connotes contraction. Euroland’s reading was above 50 for the first time since May 2008, while the U.S. reading recorded the third straight score of more than 50 and the ninth rise in the past ten months.
The latest monthly U.S. improvement was concentrated in production, which jumped 7.6 points 63.3. Jobs catapulted 6.9 points and crossed above 50, while new orders dipped 2.4 points to 58.4.
In the euro area, production advanced in France, Germany, the Netherlands, and Austria but fell in Spain, Ireland and Greece. Orders had a score of more than 50 and the highest in 26 months, led by gains in France and Germany. But export orders did not perform as well as domestic demand in the euro area and worsened in Mediterranean countries such as Italy, Greece and Spain. Inventories, especially in Germany, continued to contract, and so did jobs, as the employment score fell below 50 for a seventeenth consecutive time, albeit to a lesser extent than in September.
Currency developments also lie behind an improved British PMI in manufacturing. Such jumped 3.8 points, not marginally as projected, and reached the highest reading (53.7) since November 2007. The index bottomed in November 2008 at 34.5. In just under a year, the euro climbed 22.2% against sterling from Gbp 0.7695 on October 20, 2008 to Gbp 0.9402 on October 13, 2009.
Moral of the story: In disinflationary or deflationary times, it’s best for most countries to have a depreciating currency, subject to two caveats. An economy that has borrowed heavily in foreign currency will find debt servicing more burdensome, and the United States has to guard against squandering the dollar’s reserve asset status and the enormous economic advantages that come with that role.
| Mf’g PMI’s | United States | Euroland | Spread | EUR/USD |
| Feb 2008 | 48.8 | 52.3 | -3.5 | 1.475 |
| March | 49.0 | 52.0 | -3.0 | 1.553 |
| April | 48.6 | 50.7 | -2.1 | 1.574 |
| May | 49.3 | 50.6 | -1.3 | 1.555 |
| June | 49.5 | 49.2 | +0.3 | 1.557 |
| July | 49.5 | 47.4 | +2.1 | 1.577 |
| August | 49.3 | 47.6 | +1.7 | 1.497 |
| September | 43.4 | 45.0 | -1.6 | 1.437 |
| October | 38.7 | 41.1 | -2.4 | 1.331 |
| November | 36.6 | 35.6 | +1.0 | 1.268 |
| December | 32.9 | 33.9 | -1.0 | 1.351 |
| Jan 2009 | 35.6 | 34.4 | +1.2 | 1.326 |
| February | 35.8 | 33.5 | +2.3 | 1.303 |
| March | 36.3 | 33.9 | +2.4 | 1.306 |
| April | 40.1 | 36.8 | +3.3 | 1.318 |
| May | 42.8 | 40.7 | +2.1 | 1.365 |
| June | 44.8 | 42.6 | +2.2 | 1.401 |
| July | 48.9 | 46.3 | +2.6 | 1.409 |
| August | 52.9 | 48.2 | +4.7 | 1.426 |
| September | 52.6 | 49.3 | +3.3 | 1.455 |
| October | 55.7 | 50.7 | +5.0 | 1.489 |
Copyright Larry Greenberg 2009. All rights reserved. No secondary distribution without express permission.
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At the end of the day, what is the cause? Is its source in monetary/fiscal policies, or substantive economic activity?
Your opinion?
If I understand your question correctly — namely, what caused manufacturing to improve in the United States relative to the euro area — I believe my post puts the blame on the euro’s rise against the dollar. Manufacturing comprises the bulk of traded commerce, so this component of GDP is much more sensitive to movements in currencies and associated changes in competitiveness than is non-manufacturing, which is measured by the services PMI. When inflation is a risk, a depreciating currency reinforces upward pressure on prices by driving up the cost of imports and import-competing goods. It also lifts interest rates and creates a reason for central banks to tighten monetary policy. At disinflationary times like these, none of these problems are very relevant. A depreciating currency also stimulates export demand and strengthens the trade balance. An irony of currency market dynamics is that currency movements are a response to how investors see future trends developing at fixed exchange rates. The resulting shift in currency values often, as in this example, tends to countermand the expected future economic relationships to which currency markets have responded. The euro’s rise weakens the euro’s trade fundamentals and hence the initial jusification for a stronger euro.