Ask the PMI

Euro zone stabilizing, but still with internal bleeding, manufacturing data show

February 1, 2013
Obsession
Euro Crunch
February 1, 2013

Markit’s euro zone manufacturing purchasing managers’ index (PMI), which reflects manufacturing activity, came in at 47.9 in January (pdf), compared with 46.1 the prior month. (A reading above 50 signals growth; below 50 indicates a contraction.)

Here’s the translation: euro-zone manufacturing got worse more slowly. It’s not growing, mind you. But it’s also not shrinking as quickly as it had been. And in our “Euro Crunch” obsession category, that counts as reason to break out the champagne.

The best news, perhaps, was that the PMI for individual countries showed Spain and Italy reviving; in fact, they are at 19-month and 10-month highs, respectively. The strongest improvement was in Germany, which is good news after the country’s fourth-quarter GDP contracted unexpectedly, prompting fears that it had caught the euro zone’s economic flu.

Chris Williamson, chief economist at Markit, interprets the trend as a possible reversal in euro zone fortunes. “Providing there are no further set-backs to the region’s debt crisis, these data add to the expectation that the eurozone is on course to return to growth by mid-2013,” wrote Williamson.

That “no further set-backs” is one big caveat, though. And beyond the possibility of a debt crisis flare-up, there are a few other dark spots in the euro-zone PMI data:

Unemployment: Manufacturing employment fell for the twelfth straight month, and at a brisker clip than the last two months. Every country but the Netherlands saw jobs slashed, though the bloodletting was greatest in Germany, France and Italy. This is due to the apparently growing excess capacity in the region.

Falling consumer spending: The big albatross around the neck of euro-zone manufacturing is domestic demand. Laments about it came up in every report, except for in Germany and—sort-of surprisingly—the UK. In Italy, “a welcome return to growth of new export business after two months of decline” merely served to emphasize “a further deterioration in domestic market demand,” wrote Markit economist Phil Smith (pdf, p.2). He continued, “A key element in this weakness remains falling consumer spending, and the chances of a swift turnaround of this ongoing trend were dealt another blow by more substantial job cuts at manufacturers over the month.” Meanwhile, in France, domestic demand was “again the key source of weakness” (pdf, p.1). Spaniards too are not ponying up for manufactured goods.

This fall in demand will erode pricing power if it continues, and that will compress euro-zone manufacturing margins even more. This is a particularly scary state of affairs given another scary trend: the strengthening euro. This is the pattern that will keep whittling away at margins:

Screen Shot 2013-02-01 at 7.28.02 AM

Rising input costs: This came up in the Markit country reports a lot. In the euro zone as a whole, input costs increased for the fifth consecutive month. UK firms are being forced to remain cost-conscious (pdf, p.2), remarked David Noble, CEO of Chartered Institute of Purchasing & Supply. Spanish manufacturers ate rising input costs, lowering their prices to try to gin up demand, slashing them by the fastest rate in three months. Only Germany came through January relatively unscathed by input prices, apparently, due to lower steel prices.

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