EMU: PMI Composite FLASH

Thu Dec 14 03:00:00 CST 2017

Consensus Actual Previous
Composite - Level 57.2 58.0 57.5
Manufacturing - Level 59.9 60.6 60.0
Services - Level 56.0 56.5 56.2

Largely courtesy of a very robust manufacturing sector, the Eurozone economy apparently closed out 2017 in surprisingly good shape. At 58.0, the flash composite output index was up 0.5 points versus its final reading in November and slightly stronger than expected. It was also at an 82-month high.

The latest improvement in overall business activity reflected accelerated growth in both manufacturing and services. However, it was the former that saw its flash PMI climb a further 0.5 points to a new record peak of 60.6. Its services counterpart advanced a more modest 0.3 points to 56.5, although this too constituted its best outturn in some eighty-two months.

Boding particularly well for future output, aggregate new business saw its largest increase in more than a decade and backlogs continued to accumulate. Job creation remained very strong and the net addition to manufacturing payrolls was the most marked in the survey's history. Nonetheless, rising pressure on capacity was apparent in a lengthening in average delivery times to an extent not seen since May 2000 as manufacturers reported a record increase in the amount of inputs purchased. Predictably, after surprising on the downside in October and November, business confidence rebounded.

Meantime, input costs rose sharply again in both sectors, notably in manufacturing. The overall rate of inflation dipped from November, but remained among the highest seen over the past six-and-a-half years. In response, output price inflation eased marginally from November but also still posted one of its highest rates in more than six years.

Regionally, the core countries enjoyed a very healthy December (France flash composite output index 60.0, Germany 58.7). Elsewhere, on average growth lagged behind the big two countries but still saw one of the fastest rates since the global financial crisis.

The ECB should be very happy with today's results. Taken at face value, the December PMIs suggest quarterly growth of total output around the 0.8 percent mark, up from the already respectable 0.6 percent GDP rate posted in July-September. Although manufacturing is doing most of the work, services are performing well and with capacity pressures clearly building, the central bank's wish for a sustained shift higher in underlying inflation could yet be fulfilled in 2018.

The flash Composite Purchasing Managers' Index (PMI) provides an early estimate of current private sector output by combining information obtained from surveys of the manufacturing and service sectors of the economy. The flash data are released around ten days ahead of the final report and are typically based upon around 75-85 percent of the full survey sample. Results are synthesised into a single index which can range between zero and 100. A reading above (below) 50 signals rising (falling) output versus the previous month and the closer to 100 (zero) the faster is output growing (contracting). The report also contains flash estimates of the manufacturing and services PMIs. The survey, produced by Markit, uses a representative sample of around 5,000 manufacturing and services companies, the former including Germany, France, Italy, Spain, the Netherlands, Austria, the Republic of Ireland and Greece and the latter Germany, France, Italy, Spain and the Republic of Ireland.

Investors need to keep their fingers on the pulse of the economy because it dictates how various types of investments will perform. By tracking economic data such as the purchasing managers' manufacturing indexes, investors will know what the economic backdrop is for the various markets. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers less rapid growth and is extremely sensitive to whether the economy is growing too quickly and causing potential inflationary pressures.