Purchasing Managers Surveys: Smaller U.S. Advantage Against Euroland

March 3, 2011

The United States and Euroland experienced fairly decent activity in both service sector activity and manufacturing last month according to purchasing manager survey data released this week.  In a scale where a score of 50.0 delineates neutrality between expansion and contraction and readings of 60 connote a truly brisk pace, none of the four overall measures for February was lower than 56.8, and three of the four indicies were at 59.0 or higher. 

Among the service sector reports, which were released today, the U.S. reading of 59.7 was the best score since mid-2005, and Euroland’s 56.8 was the highest reading since August 2007 when the financial crisis began.  A 0.3 point improvement in the U.S. index from January was restrained by a 0.5-point drop in new orders.  Euroland’s data mask considerable disparity among members, but that gap actually narrowed last month.  The German index fell 1.7 points to 58.6 and slid under France’s reading, which advanced 1.9 points to 59.7.  The service-sector indices in Italy, Spain and Ireland increased in February by 3.2, 1.5 and 1.2 points, but they were in the low-to-mid 50’s and thus reflecting slower growth than France and Germany are enjoying.

The right-most column in the table below adds the U.S. minus Euroland spreads in manufacturing and services.  Such had jumped 2.7 points to +7.0 in January from +4.3 in December, but February with a combined spread of +5.3 saw January’s incremental improvement cut by more than half.  The factory spread narrowed by 1.1 points, and the service-sector spread slid by 0.6 points.

All of these surveys indicated escalating commodity cost pressures in the two economies yet subdued core inflation, abundant slackness in productive resources, and reasonably anchored expected inflation.  The message from top Fed officials conveys little urgency to raise the Fed funds target range of zero to 0.25%.  In contrast, the ECB today gave a very strong indication that its 1.0% refinancing rate will be hiked next month to at least 1.25%.  Once again, European monetary policy is countering a potential future inflation in a preemptive way before any sign of rising expected inflation, thus underscoring the single purpose of its mandate, which is maintaining price stability.  Fed policy is more complicated and discretionary, as its orientation must be divided between maximizing employment and suppressing inflation, goals which can be contradictory.  In spite of the dollar’s intrinsic advantages — deep and liquid capital markets for one thing, America’s geopolitical superpower status for another, and its dominance of reserve asset portfolios for a third — it’s no wonder that the dollar has followed a long-term downtrend.

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 52.7 51.8 +0.9 57.1 54.2 +2.9 +3.8
March 54.1 54.1 0.0 60.4 56.6 +3.8 +3.8
April 54.6 55.6 -1.0 59.6 57.6 +2.0 +1.0
May 54.8 56.2 -1.4 57.8 55.8 +2.0 +0.6
June 53.5 55.5 -2.0 55.3 55.6 -0.3 -2.3
July 53.7 55.8 -2.1 55.1 56.7 -1.6 -3.7
August 52.8 55.9 -3.0 55.2 55.1 +0.1 -2.9
Sept 53.9 54.1 -0.2 55.3 53.7 -0.4 -0.6
October 54.6 53.3 +1.3 56.9 54.6 +2.3 +3.6
November 56.0 55.4 +0.6 58.2 55.3 +2.9 +3.5
December 57.1 54.2 +2.9 58.5 57.1 +1.4 +4.3
Jan 2011 59.4 55.9 +3.5 60.8 57.3 +3.5 +7.0
Feb 59.7 56.8 +2.9 61.4 59.0 +2.4 +5.3

Copyright 2011 Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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