European Economic Data – 10/24

September rebound and the feelgood central bank mania, such that it was, is over.  Germany looks to have finally been dragged into the economic morass by the periphery:


European Manufacturing PMI: 45.3 vs. Exp. 46.5 (Prev. 46.1)

- European PMI Services: 46.2 vs. Exp. 46.4 (Prev. 46.1)

- European PMI Composite: 45.8 vs. Exp. 46.5 (Prev. 46.1); lowest since June 2009

German Manufacturing PMI: 45.7 vs. Exp. 48.0 (Prev. 47.4)

- German Services PMI: 49.3 vs. Exp. 50 (Prev. 49.7)

German IFO Business Climate: 100.0 vs. Exp 101.6 (Prev. 101.4)

- IFO Current Assessment: 107.3 vs. Exp 110.0 (Prev. 110.3)

- IFO Expectations: 93.2 vs. Exp 93.6 (Prev. 93.2)


At 48.1 in October, the seasonally adjusted Markit Flash Germany Composite Output Index was down from 49.2 during September and signalled a further moderate reduction in overall private sector business activity. The index has now posted below the neutral 50.0 value for six consecutive months. With the latest reading close to the average for Q3 2012 (47.9), the latest survey suggests an ongoing lack of momentum across the German private sector economy.


Output continued to fall in response to a further marked contraction in new orders. The rate of decline in new business eased slightly since September, which had seen the largest drop since June 2009.

Slightly weaker rates of decline in both business activity and new orders in the service sector contrasted with faster contractions in the goods producing sector. Subsequently, manufacturing again saw the steeper downturn of the two sectors.


Although moderating since the previous month, rates of contraction remained considerable for both services and manufacturing output.  Panellists generally attributed lower activity levels to a further drop in  incoming new business. The index measuring overall new work was only marginally above September’s 41-month low, and remained indicative of a steep pace of decline.

Anecdotal evidence pointed to weak demand conditions amid a difficult economic climate. There were reports that clients, especially some firms in the autos sector, had postponed orders and reined in investment due to a lack of confidence in the outlook. Manufacturers again recorded a particularly steep drop in new work, primarily reflective of domestic weakness but also affected by the fastest fall in export sales since May 2009.


German business confidence unexpectedly fell to the lowest in more than 2 1/2 years in October as the sovereign debt crisis damped growth in Europe’s largest economy.

The Ifo institute in Munich said its business climate index, based on a survey of 7,000 executives, dropped to 100.0 from 101.4 in September. That’s the sixth straight decline and the lowest reading since February 2010. Economists predicted an increase to 101.6, according to the median of 39 forecasts in a Bloomberg News survey.

Ah, the dreaded “unexpected” decline.  It’s only unexpected if you actually believe currency debasement is positive for anything outside of the financial economy cartel.  ”Economists predicted” – there’s you’re problem.

On October 24th, 2012, posted in: Economy by
3 Responses to European Economic Data – 10/24
  1. Obviously, Europe’s economy is not performing well but from our perspective, how much does this matter? US exports to Europe through August were down about 10% from last year or $20 billion. In the context of a $16 trillion economy that is nothing. I get that the potential danger here is that the European banking system implodes and takes down some US institutions with it but how large is that danger? I don’t think US banks are unaware of what’s going on in Europe so what is the exposure? In the 2008 crisis, our exports to Europe dropped by roughly 19%. So are we looking at something potentially worse? I’m just trying to get a handle on the magnitude of the potential tail risk here.

  2. Direct exports from the US to Europe is not the only effect of a continental recession. There are numerous other indirect associations and channels that suffer, including financial transmission of negative shocks. How many US companies derive significant revenue and, more importantly, profits from European divisions and subs? Less profitable foreign operations have an effect on how a company will make decisions for the overall company, including domestic operations (European subs that no longer generate sufficient cash flow can have a chilling effect on capex and hiring decisions in the US). This is particularly true for industrial and manufacturing companies – the very industries getting hit the hardest right now. The rise of multinational firms and their global reach has turned various loosely-linked national economies into a much more closed system.

    There are still national impacts in that framework as well, but they likewise have conformed to the loop. Japan sells a lot of crap to Europe, so a slowdown in Europe can lead to lower demand from Japan for foreign products (yes, Japan does import some things) Marginal declines in demand for natural resources can knock down BRIC or emerging market demand for US goods, etc. Keynesians have destroyed the concept of a multiplier certainly in the public mind, but that doesn’t mean multipliers don’t exist in economics. Multiplied effects go up the more closed a system is. The global trade system is now more closed than at any point in human history. Effects in one segment spread and multiply everywhere.

    But Europe in itself is not the sole problem for the US. A recession is like an engineering failure – there usually is a cascade of things that come together at inopportune moments to produce catastrophic system failure. The US is already in a weak-growth, downward trend in its own right (thanks Uncle Ben Sugar and his impulse to diminish real disposable income). Europe is meaningful as a failure in growth channel redundancy. Can the US economy survive with weakening consumers AND a weakening export economy AT THE SAME TIME earnings in the US have peaked WHILE structural growth problems erode basic economic impulses like turning corporate profits into capex (again, monetarily related to distorted prices of money and credit). Economies, like the people that make them, are extremely resilient, but how many simultaneous blows can they take? And these are not rabbit punches either.

    On a tangentially linked topic, at some point someone in the economist class of central bankers will use this as an excuse for instituting a globalized monetary framework. The closed system of the global economy can be used as the scapegoat for failure of the various national central banks to “stimulate” a recovery into existence, ipso facto, a more centralized monetary structure is needed to match the global trade/economic structure. This has already been hinted at in some quiet ways, but a renewed global recession will, I think, move this idea to the front burner. Maybe elections do matter.

  3. Well, yes I get that there are multiple ways the global economy can be affected but they might not all be negative and multipliers run in both directions. Lower commodity prices in particular could have an impact globally not only on consumers but also economies, like Japan, that import most of these items. I’m also not that convinced that lower profits in Europe have much effect on US hiring and investment since most of those profits remain offshore anyway. Obviously, money is fungible and US companies might borrow in the US market based on those offshore profits so it has some effect but I don’t know how to quantify it. Lower oil prices might also finally stop the waste of capital we’ve seen going into shale oil. That capital then would at least stop being wasted and be available for something more productive when the time comes. That might not be a near term positive but it should be long term.

    We should also think about more micro effects. Are there any companies/industries that will benefit from what is going on in Europe? What effect will reduced exports to Europe have on the Yen and what effect will that have? What about the Euro/US dollar rate? What effect will a weaker Euro have?

    If Jeff is right and the US is headed back to recession, we have to be very creative about finding ways to profit for our clients. In the past it was just a matter of buying Treasuries and waiting things out. That might not be the best option right now. Is there nothing else we can do? Unless we are headed for a 2008 style event where everything is highly correlated, there will be pockets of profit opportunity and we need to find them.

    I’m more wary about the US economy than I was a few months ago, but I am still unsure of the magnitude of any slowdown. We’ve been growing at roughly 2% for the last two years and so far I don’t see anything that makes me think it is much lower than that right now. To further your engineering analogy, most engineering failures are not catastrophic. The result is usually and more likely just sub-optimal performance.

    A globalized monetary framework? Damn it seems like we used to have one of those but something happened to it. Oh yeah, the gold standard. I find it hard to believe after the Euro debacle that any country would willingly sign away their monetary independence anytime soon. A new global recession might mean a lot of things but a new Bretton Woods seems unlikely.


Leave a Reply