The Markit Manufacturing PMI for the Eurozone hit a 24-month high just above the magical 50 line. While the Services PMI fell just short of 50, it was at 49.6, a level not seen in 18 months. These snapshots of economic function have provided a spike of optimism against the dismal European depression that has been unshakable.

There should be more caution in interpreting these numbers, however, given the nature of the PMI survey. While it would be nice if these numbers could be interpreted as a “bottom”, all they really tell us is that for most of Europe conditions did not get any worse in the segments and industries surveyed.

In employment, for example, Markit noted that:

“The ‘periphery’ likewise saw a corresponding easing in the rate of job losses to the weakest since September 2011, though the rate of job cutting remained solid.”

What is being measured is the second derivative in each data point, not the absolute levels:

“The easing in the rate of loss of new business was a factor helping drive expectations for service sector business growth in the year ahead to the highest since April.”

Companies are still losing business, just not as quickly. I guess given the scale of depression, that is something to look forward to – less of less business, but still less business.

There are the usual questions, particularly on the manufacturing side, whether this “rebound” is durable or whether we are seeing the usual mini-cycle related to inventory movements and, in the case of Europe, currency changes. To that end, other data sources highly conflict with this continental rosiness.

We know from the Chinese trade data that exports from China to Europe fell a rather large 8.3% in June. Now I suppose that domestic European manufacturers could potentially be making up a currency-induced decline in demand for Chinese goods, but the euro has not depreciated near enough against the yuan to explain such a decline (and the last sixty days the euro has actually strengthened somewhat against the Chinese currency). Given the second derivative nature of the PMI, it still seems more likely that Europe remains in the grips of falling demand, just at a more constant rate of falling demand.

That is also confirmed by the ongoing collapse in new car registrations – a factor that almost fully contradicts the optimism seemingly implied by the Manufacturing PMI. While certainly not as large a proportion as previous decades, automobile manufacturing has certainly a huge marginal impact. Registrations across the EU fell 5.6% in June over June 2012. In the first half of 2013, registrations fell 6.6% from the first half of 2012. And if you take away activity in the UK, the pace of contraction in June is 9.2%.

Some of the individual country automobile numbers are just astounding for June: Cyprus -37% (not really unexpected), Netherlands -53.6%, Ireland -73.7%. At least Portugal’s auto market is up 17%, though Switzerland (not part of the EU) is down 27.6%.

I have made the point before that such contraction in automobile trade is inconsistent with “optimism” in other numbers. The only way to reconcile these differences is that second derivative focus, namely that there is still contraction in Europe but at a consistent rate. However, that is a far cry from extrapolating into a “recovery”, as if the V-shape is making a re-appearance in the economic lexicon (though this “best-case” would be far more like a very compressed W).

 

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