Worst U.S. Services Activity Since January, Poorest Compared to Euro Area in Nine Months

September 3, 2010

The Institute of Supply management reported a 2.8-point decline last month in the non-manufacturing U.S. purchasing managers index.  At 51.5, such was two points plus weaker than forecast, the lowest reading since January, and below the twelve-month average score of 52.3.  Sub-components of the survey like production (54.4) and orders (52.4) revealed slower rates of expansion, being 3.0 and 4.3 points below their July levels.  Jobs actually contracted, falling 2.7 points to 48.2.  Note that readings of 50 constitute the dividing line between expansionary and contracting trends.  There was one sharp increase in prices, which advanced 7.6 points to 60.3 — quite a distance from any threat of deflation. 

Euroland’s non-manufacturing PMI, reported earlier today, edged up a tenth to a robust 55.9, with gains of 1.8 points in Italy to 51.4 and 0.7 points in Germany to 57.2 counterbalancing drops of 2.1 points in Spain to 49.2, 2.8 points in Ireland to 52.9 and 0.7 points in France to a still-lofty 60.4.  In other countries for which service PMI surveys get reported, increases occurred of 2.4 points in Japan, 1.3 points in China, 1.0 point in Hong Kong, and 0.9 of a point in Australia.  Other very disappointing results like in the United States were reported by Great Britain (down 2.0 points to a 16-month low of 51.3) and Russia (down 7.2 points to a 15-month low of 47.0).  India’s index dropped 2.4 points but, at 59.3, signaled continuing brisk activity and accelerating demand-induced inflationary pressure.

The differential between the U.S. and euro zone service-sector PMI readings was minus 4.4 in August, 2.9 points more disadvantageous for the United States than the spread of minus 1.5 in July.  One has to go back to last November to find a worse comparative result, and the spread has shifted in Euroland’s favor since March by 5.7 points.  This is a remarkable reversal of fortunes since the spring when market angst was concentrated on Europe’s sovereign debt crisis.  Back in March, the U.S. manufacturing PMI was 3.0 points higher than Euroland’s, and the sum of the spreads between manufacturing and non-manufacturing purchasing manager indices of the two regions was +4.3 in America’s favor.  The sum of those spreads is now 3.2 but in Europe’s favor.

The PMIs contain information that is more forward-looking than the U.S. labor force survey reported earlier today.  The news from the Labor Department triggered a relief rally in the markets because it confirmed that a double-dip recession is not at hand.  Employment fell only half as much in August as expected, and the declines in June and July were revised downward by a combined 123K.  But the broader picture is dark.  The U.S. labor market shows only a little bit of spark, and the trend has been toward a recovery whose momentum is ebbing.  The PMI reports also suggest that U.S. news in the labor market and other areas will become worse than we’re seeing now. 

The bulleted points below summarize what’s happening in the U.S. labor market, and this is followed by a summary table comparing trends since early 2009 in the U.S. and euro area purchasing manager series.

  • The jobless rate rose to 9.64% and is less than a half-percentage point below the high for the recession of 10.1% last October.  With a 48.2 reading on the employment services PMI subindex, 10.1% may yet get eclipsed.
  • The broadest measure of unemployment and underemployment rose two-tenths to 16.7%.  One of every six members of a frightened and angry labor force fall into this category.
  • Weekly average hourly earnings were unchanged in August and up just 1.7%.  Depleted household wealth, the impetus to reduce debt, and high joblessness require that earnings do better than this if ample consumption is to persist.
  • Non-farm payroll jobs have advanced 723K this year or just 90 per month.  That’s half as much as the 1990’s monthly pace of increase.
  • Speaking of the 1990s, employment is still 221K lower than such was in December 1999 at the end of the decade, and it is 7.64 million short of the prior cyclical peak in December 2007.
  • Employment fell 94K per month in June-August, the first running three-month contraction since 12/09-02/10.  Jobs rose 112K per month between February and August, the smallest six-month increase since the period between October 2009 and April 2010. 
PMIs U.S. Ezone   U.S. Ezone   Sum of
  Services Services Spread Mf’g Mf’g Spread Spreads
Feb 2009 42.1 39.2 +2.9 35.7 33.5 +2.2 +5.1
March 41.2 40.9 +0.3 36.4 33.9 +2.5 +2.8
April 43.9 43.8 +0.1 40.4 36.8 +3.6 +3.7
May 44.5 44.8 -0.3 43.2 40.7 +2.5 +2.2
June 46.3 44.7 +1.6 45.3 42.6 +2.7 +4.3
July 46.7 45.7 +1.0 49.1 46.3 +2.8 +3.8
August 48.2 49.9 -1.7 52.8 48.2 +4.6 +2.9
Sept 50.1 50.9 -0.8 52.4 49.3 +3.1 +2.3
October 50.1 52.6 -2.5 55.2 50.7 +4.5 +2.0
November 48.4 53.0 -4.6 53.7 51.2 +2.5 -2.1
December 49.8 53.6 -3.8 54.9 51.6 +3.3 -0.5
Jan 2010 50.5 52.5 -2.0 58.4 52.4 +6.0 +4.0
Feb 53.0 51.8 +1.2 56.5 54.2 +2.3 +3.5
March 55.4 54.1 +1.3 59.6 56.6 +3.0 +4.3
April 55.4 55.6 -0.2 60.4 57.6 +2.8 +2.6
May 55.4 56.2 -0.8 59.7 55.8 +3.9 +3.1
June 53.8 55.5 -1.7 56.2 55.6 +0.6 -1.1
July 54.3 55.8 -1.5 55.5 56.7 -1.2 -2.7
August 51.5 55.9 -4.4 56.3 55.1 +1.2 -3.2

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.

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