Investors seem to have perceived a possible improvement in the economic momentum in the Euro Area after the publication of the Markit survey for October. That was one reason for markets stronger dynamics. I think they are wrong. The economic situation is not improving in the Euro Area.
3 graphs to perceive this weaker momentum
In the first chart I build a synthetic index for the whole economy that is based on synthetic indices from the manufacturing and the service surveys*. The synthetic index for the whole economy is weighted average of the two sub-indices. The weight is employment in each sub-sector (I have the same profile if I use added value).
The index reflects activity (which is what is usually taken as the synthetic index), employment, backlog orders and flows of new orders.
In October, this index is still trending downward and is just above the threshold of 50 that separates improvement and contraction of the economic activity.
This suggests that a rebound or a rapid change in growth momentum cannot be expected in the short run.
The second graph shows that the marginal improvement in the manufacturing index is largely compensated by the slower dynamics seen in the service sector.
The improvement in the manufacturing sector must be examined carefully. It reflects stronger production and employment indices. It also shows a contraction in the new orders index (for the second month in a row) and higher inventories. To perceive the dynamics behind, I like to look at the following indicator which is the ratio of new orders to inventories. This ratio is consistent with the three-month change in the manufacturing index published by Eurostat.
The third chart shows that the ratio is below 1. This should lead to a further contraction in the manufacturing production index in the coming months.
The enthusiasm seen on financial markets after the publication of this Markit survey was misplaced, alas.
* The synthetic index in the service sector is a weighted average of employment (0.2), backlog orders (0.25), business activity (0.25) and new business (0.3).