Economic activity continued to lose ground in October and at a faster pace than in September. The headline composite output index fell from the previous month's final 46.4 to 45.8, even further below the 50-expansion threshold and also nearly a full point short of the market consensus. This was the fourth successive month of contraction.

The headline deterioration was wholly attributable to services where the flash sector PMI dropped from September's final 50.3 to 48.0. Its manufacturing counterpart actually rose from 39.6 to 40.7, a 5-month high but still deep in recession territory.

Within manufacturing, output (41.4 after 38.7) declined at a slower pace than at quarter-end but the fall was still steep. More generally, overall orders saw their most marked slide since May 2020 with hefty losses recorded in both sectors. Backlogs were also depleted again, albeit by somewhat less than previously, and weak demand in turn ensured a broad-based reduction in headcount. Business expectations remained weak but were a little less pessimistic than in September.

Inflation developments were mixed. Input costs rose sharply in services but fell significantly in manufacturing. A similar pattern was true of output prices which left overall inflation little changed from September's 31-month low.

All in all, the October report is disappointingly weak and must increase the chances of Germany sliding into recession by year-end or early in 2024. Still, with the German RPI at minus 12 and the RPI-P at minus 7, economic activity in general is only lagging slightly behind market expectations.

Manufacturing has contracted for 15 months in a row and very deeply so once again in September at 39.6. No significant improvement is expected for October where the consensus is 40.0. Services, at 50.3 in September, is seen at 50.1. Consensus for October's composite is 46.7 following September's 46.4.

The flash Composite Purchasing Managers' Index (PMI) provides an early estimate of current private sector business activity by combining information obtained from surveys of around 1,000 manufacturing and service sector companies. The flash data are released around ten days ahead of the final report and are typically based upon around 85 percent of the full survey sample. Results covering a range of variables including manufacturing output, employment, new orders, backlogs and prices are synthesised into a single index which can range between zero and 100. A reading above (below) 50 signals rising (falling) activity versus the previous month and the closer to 100 (zero) the faster is activity growing (contracting). The report also contains flash estimates of the manufacturing and services PMIs. The data are produced by S&P Global.

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.