3 Numbers to Watch: Eurozone PMIs, US manufacturing PMI & output
Monday offers a number of key economic reports, including several flash estimates on purchasing managers indexes (PMIs) for December. Of particular interest is the first look at this month's Eurozone PMI data for manufacturing and services, followed by the US PMI report for manufacturing. We'll also see the hard data on US industrial production for November. For additional context on the Eurozone trend, keep an eye on today’s December flash PMI reports for France (07:58 GMT) and Germany (08:28 GMT).
Eurozone Manufacturing & Services PMIs (08:58 GMT) Today’s update on the mood among manufacturers will draw wide attention for clues about December's macro profile in the wake of last week’s surprisingly weak report on industrial production. Eurostat revealed that industrial output in Europe retreated by a steep 1.1 percent in October, the second monthly decline in a row and the biggest drop in more than a year (pdf). The year-over-year change is still positive, but just barely. Industrial production grew 0.2 percent in October, matching the previous month’s slim advance.
Can Eurozone manufacturing surprise to the upside today after European output fell 1.1% in October? Photo: Shutterstock.com
The disappointing news raises questions about Europe’s economic recovery and what the European Central Bank (ECB) can do to keep the macro funk from triggering another recession. By some accounts, it’s only a matter of when, not if, the ECB rolls out a new stimulus program. On the short list of possibilities: a new incarnation of the Long-Term Refinancing Operation (LTRO), a program of providing financing to Eurozone banks.
Meantime, today’s flash estimate of the Eurozone Manufacturing PMI will provide new context for assessing the leading edge of the economic activity. In the last batch of updates, both the manufacturing and services sectors continue to reflect modest growth rates. In fact, the manufacturing trend has inched higher lately. “The recovery in the Eurozone manufacturing sector accelerated again in November,” Markit Economics noted earlier this month (pdf). But the contrast in the PMI numbers with the hard data on industrial activity suggests that Markit’s surveys of late might be wrong. Perhaps today's numbers will help sort out the true trend.
To be fair, the sentiment data isn't uniformly upbeat. The Eurozone Services PMI for last month inched lower for the second time in a row (pdf). Although the services PMI is still above the neutral 50 mark, the recent weakness looks worrisome because it suggests that Europe’s escape from recession earlier this year is still tentative at best.
US Manufacturing PMI (13:58 GMT) Today’s PMI update offers the first look at December data for the US in this cyclically sensitive sector. One question that may be resolved is whether the stronger growth reflected in the competing ISM Manufacturing Index is accurately tracking the trend. In the ISM update for November, this benchmark increased to its highest level since 2011. “While encouraging, these recent ISM data have been notably stronger than other manufacturing-related indicators and have to be interpreted against the backdrop of a challenging domestic and world business climate,” the senior economist for the Manufacturers Alliance for Productivity and Innovation said earlier this month.
Perhaps today’s PMI release will provide some clarity. In the previous update, Markit’s US Manufacturing PMI jumped sharply, rising to the highest level since this past January. The hefty gain narrowed what had been a relatively wide gap compared with the stronger ISM data in recent months. “One of the most encouraging trends we are seeing is a surge in the production of capital goods such as plant and machinery, which is growing at the fastest rate since the financial crisis, fuelled by rising domestic demand,” Markit’s chief economist said in a press release for the final November numbers (pdf). “This is a great sign that companies are feeling sufficiently confident to be boosting investment.” In fact, the consensus forecast sees today's number for December rising a bit to 55.0 from 54.3 previously.
What’s behind the robust manufacturing trend these days? Energy, according to some analysts. The extraordinary rise in US oil production lately (thanks to a new generation of drilling technologies). “The rise in production generates a tremendous amount in operating spending” across various industries, an IHS economist recently explained. “There definitely is a manufacturing story in all of this.”
US Industrial Production (14:15 GMT) The previous report on industrial activity was disappointing, but October’s slight retreat doesn’t reflect the overall macro trend these days. As one clue, consider that the manufacturing component in the Federal Reserve’s estimate of industrial output posted a small rise in the preliminary report for October. That’s not surprising, given the recent strength in manufacturing lately, according to other sources (see PMI analysis above).
One consensus forecast for today's November release sees industrial output rebounding with a 0.5 percent rise. My econometric estimate is a bit softer although still comfortably in the black. The resilience in the overall macro trend for the US is hard to miss these days — last week’s update on the robust rise in retail spending in October, for instance.
The slow but steady recovery in the outlook for the economy among Americans is another sign for expecting that the moderate growth train will roll on for the near term. Gallup’s Economic Confidence Index rose again in last week’s update, reminding that a revival in sentiment on Main Street is intact. “Despite drops in confidence this year after the fiscal cliff deal, automatic budget sequestration cuts, and the recent government shutdown, the yearly average is on pace to be the highest since Gallup began tracking economic confidence daily in 2008,” the polling firm advised last Tuesday.
It’s still premature to argue that the US economy is headed for a materially higher rate of growth overall, although some economists are now inclined to see better days ahead on the margins. "What we're going to see going into 2014 is that the numbers will progressively get better," says IHS’s chief economist. Today’s number on industrial production isn’t likely to challenge this encouraging outlook.