Watch second derivatives in the Eurozone

By Edward Harrison On Jun 3, 2013

Markit released a slew of manufacturing PMIs today and the eurozone was the most heavily watched amongst the bunch. The data show Europe still contracting, but at a less pronounced pace. I believe this could be a positive harbinger.

The eurozone manufacturing PMI rose to 48.3 in May from 46.7 in April, where anything below 50 means contraction. That is 22 consecutive months of contraction for Europe. If GDP comes in for Q2 below Q1’s reading it will also mark 7 straight quarters of GDP decline for the eurozone. So the economic situation for Europe is pretty bleak.

Here are the links to Markit’s PMI data press releases via twitter:

Markit/CIPS UK Manufacturing PMI hits 51.3 in May, up from 50.2 in Apr (rev.) and strongest reading since March 2012 (14-month high).
Markit Greece Manufacturing PMI hits 23-month high of 45.3 in May, up from 45.0 in Apr. PR here https://bit.ly/11cGdKO
Markit Eurozone Manufacturing PMI (final) hits 15-month high of 48.3 in May, up from April’s 4-month low of 46.7. https://bit.ly/13fprPg
Final Markit/BME Germany Manufacturing PMI hits 49.4 in May (flash: 49.0) from 48.1 in Apr. 3-month high. PR here https://bit.ly/18LtBTG
Final Markit France Manufacturing PMI at 46.4 in May (flash: 45.5), up from 44.4 in April & 13-month high https://bit.ly/10L5lwK
Markit/ADACI Italy Manufacturing PMI at 47.3 at May, up from 45.5 in Apr. 4-month high. https://bit.ly/17QmBW2 https://twitpic.com/cv1bok
HSBC India Manufacturing PMI falls from 51.0 in April to 50.1 in May (50-month low). PR here https://bit.ly/
HSBC Russia Manufacturing PMI at 50.4 in May, down from 50.6 in April. PR here https://bit.ly/ZnvxMV
HSBC United Arab Emirates PMI (whole economy, ex. oil) at 55.3 in May, up from 54.0 in Apr. PR here https://bit.ly/14auRfv
HSBC Czech Republic Manufacturing PMI rises to 50.1 in May, from 49.5 in Apr. PR here https://bit.ly/16CWrG6
SABB HSBC Saudi Arabia Whole Economy (ex. oil) Purchasing Managers’ Index at 57.3 in May, from 58.0 in April. PR here https://bit.ly/13fmpe7
HSBC Poland Manufacturing PMI up to 48.0 in May, from 46.9 in April. PR here https://bit.ly/11yzPNT
HSBC Turkey Manufacturing PMI at 51.1 in May, down slightly from 51.3 in April. PR here https://bit.ly/14au2Ub
Netherlands Manufacturing PMI up to 48.7 in May, 48.2 in April. Highest reading in three months. PR here https://bit.ly/11PV6IW
Markit Spain Manufacturing PMI up to 48.1 in May from 44.7 in Apr. Highest reading since May 2011. PR here https://bit.ly/11gfePv

Despite the bleak situation, I see the data as positive because it is steadily moving toward growth. The numbers are ‘less bad’, meaning the contraction is less severe. Another way of saying this is that the numbers are getting better. The manufacturing PMI was the highest in 15 months, for example. And so the question has to be about sustainability. For how long will these numbers continue to improve?

Well, in Germany, the PMI rose to 49.4. In Spain and Greece, where the economy is the worst, the situation improved the most. Spain’s PMI of 48.1 was a 24-month high, while Greece’s PMI of 45.3 was a 23-month high. All of these numbers are below 50 but the second derivative has turned decidly higher in Europe’s economic numbers.

I would advise you to watch the second derivative – the change in the change – because that is the statistic that presages cyclical rebounds. Right now, the change in the change in eurozone economic data is positive for the first time in a long time. And I believe this trend will continue – aided by a move to backloading austerity – until we reach recovery.