US is scorching, euro area is hot, UK is frosty

Latest data reveals a US economy which, if anything, is too strong, a euro economy that conjures up memories of Goldilocks and a UK economy that is suffering from an Arctic breeze.

Article updated: 6 April 2018 12:00pm Author: Michael Baxter

The data

So, the latest purchasing managers indexes, or PMIs, are in. If you want to be as up to date as possible with how the economy is doing, these indexes are it.

The US

Let’s start with the most impressive.

In the US, the latest purchasing managers indexes from the ISM were rather impressive. The index tracking manufacturing did drop back a touch, but only from an exceptionally high reading of 60.8 to a still very high 59.3. With these PMIs, any score over 50 is meant to suggest growth, any reading close to 60 suggests some kind of boom. In America, of course, everything is bigger, and this applies to the economic data too. There are in fact two manufacturing PMIs, the other measure, from Markit, rose to its highest level since March 2015.

As for services, the PMI from ISM also dropped a tad, but then in February the index stood at a 13-year high – 59.5, in March the index was at 58.8, still one of the highest readings this century.

Capital Economics calculates that the indices are consistent with an annualized growth rate of five per cent. In practice such a growth rate is unlikely, but even so, it does show that the US economy appears to be in very good nick, indeed.

The euro area

The story for the euro area is not quite so impressive, but for reasons I’ll come to shortly, that may be for the better.
Both the manufacturing and services PMI (from Markit), fell. The Manufacturing PMI dropped from 58.6 to 56.5.

Here is the breakdown:

Manufacturing PMI for March, from Markit

Netherlands 61.5 5-month low
Germany 58.2 8-month low
Austria 58 10-month low
Italy 55.1 8-month low
Greece 55 3-month low
Spain 54.8 6-month low
Ireland 54.1 12-month low
France 53.7 12-month low

As for services, this fell from 57.1 to 55.2.  Here is the breakdown:

Services PMI for March, Markit

France 56.3 7-month low
Spain 55.8 3-month low
Germany 55.1 8-month low
Ireland 53.7 57-month low
Italy 53.5 14-month low

So, that’s a lot of x-month lows. Bear in mind, however, that until recently the indexes were hitting their highest readings in many years, in some cases all-times highs. Falls were inevitable, and in fact the readings are still pretty good by historical standards.

Markit reckons that together, the PMIs point to growth in the euro area in March at a 0.6 per cent quarterly rate, from 0.8-0.9 per cent growth at the start of the year.

The growth rate from a few months ago, was surely unsustainably high, too hot, the current pace is close to just right, maybe we could hope for a little quicker.

The UK

As for the UK, this tells the story:

Manufacturing 55.1 Up on last month, average reading in quarter weakest in a year.
Construction 47 Fastest overall fall in construction since July 2016.
Services 54.5 20-month low.

Markit said: “The PMI surveys collectively signal a quarterly GDP growth rate of just under 0.3 per cent, down from 0.4 per cent in the fourth quarter, albeit with the rate of growth sliding to just 0.15 per cent in March alone.”
There is no doubt about it, the data on the UK for March was poor. But then much of this was down to the cold weather, construction in particular was hit by the Beast from the East. April is expected to see an improvement.


The key point to bear in mind is that in the US unemployment is at just 4.1 per cent, in the UK it is at 4.3 per cent, but in the euro area it is at 8.5 per cent. In other words, the euro area has lots of scope for growth, lots of spare capacity, plenty of room to grow without risking an increase in inflation.

The slowdown in the UK economy is a little worrying, but given the level of unemployment, you would expect it to slow a little.

The data on the US does not, to my mind, make sense. With unemployment that low, the PMIs should not be so robust.

This week, Jamie Dimon, the boss at Morgan Stanley, warned that the US was in danger of overheating and markets are underestimating the speed with which interest rates are going to have to rise. I am inclined to agree. Only some kind of productivity miracle can stop much higher hikes in interest rates than are currently being projected.

Brexit effect

We need to also pause and ask how much of the slowdown in the UK is down to Brexit? Before the referendum, and in the months after, the UK was one of the fastest growing economies in the EU and G7, now it is one of the slowest growing. How much of this is down to Brexit, how much of this is a coincidence? I would say that this is partly due to the economic cycle, it turns, and right now its positioning is better for the euro area. But Brexit was a reason too, indeed, Markit suggests that Brexit uncertainty along with the cold weather were the reasons why the PMIs have been so weak of late.

These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees.

See what else we have to say
Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.