Mike Shedlock

With everyone watching and analyzing US jobs data on Friday, there were a number of other news reports showing steeper contractions in much of the world. Let's start off with a look at the rapidly deteriorating eurozone.

Markit Eurozone Composite PMI® – Final Data

Markit reports Eurozone downturn continues at start of Q3 2012

The Eurozone economy remained in a downturn at the start of Q3 2012. At 46.5 in July, little-changed from 46.4 in June, the Markit Eurozone PMI® Composite Output Index signalled a contraction in output for the tenth time in the past 11 months. The headline index came in slightly above the earlier flash estimate of 46.4.

Manufacturers and service providers both reported lower levels of output in July. The downturn was more severe in manufacturing, where production contracted at the fastest pace since May 2009. Service sector business activity fell for the sixth month running, though the rate of decline eased to its weakest since March.

The worst performers by far were Italy and Spain. The rate of contraction in France slowed marginally, while the downturn in Germany was the steepest for over three years.









Comment:

Chris Williamson, Chief Economist at Markit said:

“The final PMI data for July confirm the message from the earlier flash estimate that the Eurozone continued to contract at a quarterly rate of approximately 0.6% in July, suggesting the region looks set for a second consecutive quarterly decline.

“With incoming new business falling at the fastest rate for three years and service sector companies becoming the gloomiest about the outlook since early-2009, there seems little prospect of any improvement soon.

Markit/ADACI Italy Services PMI®

Markit reports Italy Service Sector New Work Drops at Fastest Rate Since March 2009

Key points:

  • Activity falls markedly as a result of accelerated decline in new business
  • 12-month outlook turns negative for first time in series history
  • Rate of job shedding fastest for three months




Summary:

Conditions across Italy’s service sector took a turn for the worse in July, as incoming new business fell at the fastest rate since March 2009. Activity and
employment both dropped as a result, and for the first time since the launch of the survey in January 1998 firms generally expected output to be lower in a year’s time than current levels. Another negative development for businesses was a slight rise input price inflation from June’s seven-month low.

Outstanding business at services firms was further reduced during the latest survey period, extending the current sequence of decline to 17 months. Moreover, the overall rate of depletion quickened to the fastest since September 2009. Weakness in new business inflows was the most frequently cited reason for lower backlogs.

Comment:

Phil Smith, economist at Markit and author of the Italy Services PMI® said:

"July PMI data pointed to recession in Italy’s service sector deepening at the start of the third quarter. New business intakes fell at a sharp monthly rate that has been exceeded only four times over the series history, all of which occurred around the
height of the global financial crisis. Furthermore, data on expectations showed sentiment at a record low, and gave no impression of an impending recovery."

“Not only did July see a further deterioration on the demand front, but input cost inflation also picked up from June’s recent low. This placed greater pressure on service providers to reduce their overheads, with a solid and accelerated decrease in employment levels one outcome. At the same time, backlogs of work were still reduced at a marked pace, suggesting yet more scope for job cuts.”
Markit France Services PMI®

Markit reports Stabilisation of French service sector activity during July
Key points:

  • Final Markit France Services Activity Index(1) at 50.0 (47.9 in June), 4-month high.
  • Final Markit France Composite Output Index(2) at 47.9 (47.3 in June), 4-month high.

Summary:

French service providers reported that business activity was unchanged during July. That followed declines in each of the previous three months. New business and backlogs of work both fell at slower rates, but companies nevertheless made sharper cuts to staffing levels. Competitive pressures led to a further drop in output charges, despite another rise in input costs. Panel members signalled a weaker outlook with regards to future activity, with optimism falling to the lowest level for almost three-and-a-half years.

Manufacturers reported a steeper fall in output during July, with the rate of decline accelerating to the fastest since April 2009. Overall private sector activity was down for the fifth successive month, although the latest drop was the slowest since March.

The level of new business placed with French service providers fell for the fourth month running during July.

Manufacturers reported a further marked decrease in new orders during July, with the rate of contraction accelerating since the previous month. However, overall new business across the private sector fell at the slowest rate since March.
The rate of decline in service sector outstanding business also eased in July. The latest fall in unfinished work was the seventh in successive months, although the weakest since March.

Employment showed a deteriorating trend, with the pace of contraction accelerating to the sharpest since March 2010. Job losses were attributed by panellists to cost-saving strategies, often including decisions not to replace voluntary leavers.

With manufacturers also recording a steeper drop in staffing levels, overall employment across the French private sector fell at the fastest rate since January 2010.
Key points:

  • Final Germany Services Business Activity Index(1) at 50.3 in July, up from 49.9 in June.
  • Final Germany Composite Output Index(2) at 47.5 in July, down from 48.1 in June.



Summary:

At 50.3 in July, up slightly from 49.9 in June, the final seasonally adjusted Markit Germany Services Business Activity Index posted back above the neutral 50.0 threshold. However, the latest reading signalled only a fractional expansion of overall business activity, and was well below the long-run survey average (53.0). July data indicated that growth was largely driven by Hotels & Restaurants and Renting & Business Activities.

July data highlighted by a marked reduction in new business intakes in the service sector. Lower volumes of new work have now been recorded for four consecutive months and the rate of contraction reached its fastest since June 2009. Five of the six broad areas of the service economy recorded a drop in new business during the latest survey period, with Hotels & Restaurants the exception.

Meanwhile, overall new business intakes across the German private sector also declined at the fastest rate since June 2009.
Markit Spain Services PMI®

Markit reports New orders decrease at fastest pace since October 2011
Key points:

Further sharp falls in activity and new orders
Sentiment lowest in 38 months
Rate of job cuts accelerates

Summary:

The Spanish service sector continued to struggle at the start of the second half of 2012 as the ongoing economic crisis in Spain impacted negatively on business conditions. Activity, new orders and employment all decreased again over the month, with the fall in new business the sharpest since last October. Furthermore, companies forecast a decline in activity over the next 12 months as sentiment dropped to the lowest in more than three years.

Activity has now fallen in 13 successive months, and the latest reduction was only marginally slower than seen in June. Hotels & Restaurants was the only sector to record activity growth, while the fastest reduction was recorded at Post & Telecommunications companies.

Respondents indicated that falling new business had been the main factor behind the drop in activity. In turn, new orders declined as clients were hesitant to embark on new projects given deteriorating economic conditions. New orders fell at a sharp pace that was the fastest since October 2011.

Companies worked through outstanding business in July as new orders decreased. Backlogs of work were depleted at a substantial pace, and the steepest in seven months.

Service providers continued to lower their staffing levels during July. Employment has now fallen in each of the past 53 months. The rate of job shedding was substantial, and faster than that recorded in June. Of the six monitored sectors, the sharpest fall in employment was posted at Renting & Business Activities companies.

Services companies expect activity to fall over the coming 12 months, the first time this has been the case since May 2009. The forthcoming rise in VAT is forecast to further reduce consumer demand, and therefore business activity.

Comment:

Commenting on the Spanish Services PMI® survey data, Andrew Harker, economist at Markit and author of the report said:

"Perhaps the most worrying aspect of the latest survey is the lowest business sentiment in more than three years, partly reflecting the negative expected impact on consumption of the forthcoming rise in VAT."
Eurozone New Orders

Eurozone GDP is going to decline rapidly and businesses will shed workers if new orders continue to decline. Let's look at the new orders, expectations, and employment components from the above reports.

  • Eurozone Composite:  Incoming new business falling at the fastest rate for three years 
  • Italy: Activity falls markedly as a result of accelerated decline in new business
  • Italy:  12-month outlook turns negative for first time in series history
  • Italy:  Rate of job shedding fastest for three months
  • France: New business and backlogs of work both fell at slower rates, but companies nevertheless made sharper cuts to staffing levels. 
  • France: The level of new business placed with French service providers fell for the fourth month running during July. 
  • France:  Overall employment across the French private sector fell at the fastest rate since January 2010.
  • Germany: Lower volumes of service sector new work have now been recorded for four consecutive months and the rate of contraction reached its fastest since June 2009. 
  • Germany: Five of the six broad areas of the service economy recorded a drop in new business during the latest survey period, with Hotels & Restaurants the exception. 
  • Germany: New business intakes across the entire German private sector declined at the fastest rate since June 2009.
  • Spain:  Activity, new orders and employment all decreased again over the month, with the fall in new business the sharpest since last October. 
  • Spain: Companies forecast a decline in activity over the next 12 months as sentiment dropped to the lowest in more than three years.
  • Spain: Employment has now fallen in each of the past 53 months. The rate of job shedding was substantial, and faster than that recorded in June. 
  • Spain:  Lowest business sentiment in more than three years
  • Spain:  The forthcoming rise in VAT is forecast to further reduce consumer demand, and therefore business activity.
Wrong Approach

Countries struggling to meet budget targets have responded by raising taxes. The result of that stupidity can easily be predicted in advance: economic activity will contract further, causing budget target shortfalls.

Yet, Spain is hiking taxes to appease the bureaucrats in Brussels.

In France, prime minister Francois Hollande is about to Wreck France With Economically Insane Proposal: "Make Layoffs So Expensive For Companies That It's Not Worth It"

I wrote that before socialists took over both houses in French parliament. Many suggested he would not follow through. Unfortunately he has. Please consider my July 16 post Peugeot Has 51% Chance of Debt Default; Hollande Says France Will Not Let Peugeot Lay Off Workers

Hollande is also raising taxes like mad and French businesses are likely to head to the UK and other places in response. Many wealthy have fled the country.

Correct Approach

The correct approach is to reduce taxes and make it easier for businesses to fire workers.  Logic dictates that if it's difficult or impossible to fire workers, businesses will not hire them in the first place.

Ass-Backwards Eurozone Policies

Most countries in Europe now have ass-backwards policies in place. The silver lining in this mess is those ass-backwards policies will accelerate the breakup of the eurozone, and that is a good thing.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com


Mike Shedlock

Mike Shedlock is a registered investment advisor representative for Sitka Pacific Capital Management.
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