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Eurozone continues to decay

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EU purch index plunges


 We note more alarm bells from Europe and the major indicators are pointing downward. The chart above shows the EU purchasing managers index on a distinct downward track, and it looks very much like the early 2008 profile. We should also note that this index is (like many of the leading indicator "statistics" does not necessarily result from a precise scientific process. In fact most data is gathered in periodic surveys where managers are asked to provide comment and data which is then entered into a data base and then translated into a graph and accompanying commentary. This approach guarantees error and is in many respects quite subjective. For instance when the query comes to the purchasing manager from the collecting agency, if the manager has been wrestling with a bad day/week/month at the office, suffering through a hangover, getting a divorce, or returning from (or about to leave on) vacation, the precision of reply will be affected. After all, the data collecting agency does not sign the manager's check, nor is there any penalty for errant answers or omissions.

This being said the indicators are dropping like the proverbial rock.

When unemployment numbers are also reviewed we find little to suggest that the Eurozone is turning upward. We see similar numbers falling out of the US. The European statistics will likely reflect the US future and it appears that the European solution (as in the US) is to keep interest rates artificially low.

Question: Do our readers believe that low interest rates and loose monetary policy will solve the European and US employment and production problems?

Eurozone unemployment increasing

From Financial Times: ING’s Mr Brzeski said economic confidence was “far below historical averages in all eurozone countries” except for Germany, where unemployment remains low. But confidence is also declining in Germany, with the country’s manufacturing sector shrinking at its fastest rate in three years in June according to data from Markit’s manufacturing purchasing managers’ index. The index showed that the downturn in eurozone manufacturing extended to an 11th straight month. (read more)

From CNN Money: Roughly 25 million people were unemployed in the EU in May. Spain alone is home to more than a fifth, or about 5.7 million of those unemployed workers.

Spain's unemployment rate is 24.6%. the highest in the region. Separate data also released Monday show eurozone factories continue to sputter. (read more)

From Voice of America: Markit economist Rob Dobson said that as manufacturing has weakened, the labor market has fallen as well. "The employment numbers - we're also starting to see them come down as well, including in Germany," he said. "Indeed, all countries within that survey reported a decline in employment apart from Ireland. So what we're seeing is weakness in the output coming through into the labor market, which is going to be a bad thing for the economy heading forward." (read more)



US unemployment

From Bureau of Labor Statistics: Household Survey Data Both the number of unemployed persons (12.7 million) and the unemployment rate (8.2 percent) changed little in May. (See table A-1.) Among the major worker groups, the unemployment rates for adult men (7.8 percent) and Hispanics (11.0 percent) edged up in May, while the rates for adult women (7.4 percent), teenagers (24.6 percent), whites (7.4 percent), and blacks (13.6 percent) showed little or no change. The jobless rate for Asians was 5.2 percent in May (not seasonally adjusted), down from 7.0 percent a year earlier. (See tables A-1, A-2, and A-3.) The number of long-term unemployed (those jobless for 27 weeks and over) rose from 5.1 to 5.4 million in May. These individuals accounted for 42.8 percent of the unemployed. (See table A-12.) (read more)

From Yahoo Finance: Applications fell steadily during the fall and winter but have since leveled off. At the same time, hiring has slowed, raising concerns about the pace of the recovery. Employers added an average of only 96,000 jobs per month in the past three months. That's down from an average of 252,000 in the previous three months. Weaker hiring also pushed up the unemployment rate in May to 8.2 percent, its first rise in nearly a year. (read more)

From Knoxville Biz: A closely watched private survey released this week showed consumer confidence fell in June for the fourth straight month. The Conference Board said worries about the job market outweighed lower gas prices and steady improvement in the housing market. And U.S. manufacturing activity, which has helped drive growth since the recession ended three years ago, has weakened. Factories produced less in May than April, the Federal Reserve said this month. Automakers cut back on output for the first time in six months. In June, manufacturing activity barely grew in the New York region and contracted sharply in the Philadelphia area, according to surveys by regional Federal Reserve banks. (read more)


How the Eurozone PMI is computed (more detail than most might enjoy)

Eurozone PMI
Established in 1997, the Eurozone Manufacturing PMI is the first composite indicator out every month on conditions in eight countries: Germany, France, Spain, Italy, Ireland, Greece,
Austria, and the Netherlands. They represent 92% of all manufacturing activity in the euro currency area. (Countries in the Eurozone not represented in this PMI series are Finland, Luxembourg, Portugal, Slovenia, and Belgium.) The report is based on responses from 3,000  purchasing executives. NTC Economics collects the data from the individual national surveys and then recomputes a regional index for each of the major questions asked. Finally, an overall headline index is calculated to reflect total manufacturing activity in the region. At the heart of the surveys are questions to purchasing managers that cover six key At the heart of the surveys are questions to purchasing managers that cover six key themes:

1. Is the level of new orders received by your company higher than, the same as, or lower than one month ago? This addresses the issue of demand in the economy. If demand for goods increases, it will drive up manufacturing output. 2. Is the level of output in your company higher than, the same as, or lower than one month ago?The focus here is on whether there’s been a shift in production to higher levels because of new orders.
3. Is the stock of items purchased by your company higher than, the same as, or lower than one month ago? For manufacturers to keep their production lines running smoothly,
they need to have an ample supply of raw materials on hand. But as output accelerates, supplies typically diminish and purchasing managers need to reorder more stock. Thus, the purchase of new items is linked to the pace of production’s.
4. Are supplier delivery times experienced by your company longer than, the same as, or shorter than one month ago? Just because a purchasing places an order to replenish its
stock of raw materials doesn’t necessarily mean it will arrive overnight. Suppliers generally clanship raw materials to manufacturers faster in a slow economy. In a booming economy, however, when lots of orders for raw materials are coming in at the same time, suppliers can’t instantly satisfy all the demand. Bottlenecks emerge, and even suppliers have their own production  constraints. As a result, shipments to manufacturers slow and this leads to delays in deliveries. Thus, longer lead times between orders and deliveries of raw materials are a sign of faster economic growth, while rapid deliveries suggest slower business activity.
5. Is the average input price experienced by your company higher than, the same as, or lower than one month ago? It should come as no surprise that when many manufacturers increase orders simultaneously, demand for raw materials can outstrip supplies. This places upward pressure on factory input prices.
6. Is the level of employment at your company higher than, the same as, or lower than one month ago? There is a link between employment in manufacturing and production.
Greater demand for new orders often leads to more employment. However, over time, the relationship between jobs and output turns more tenuous. Given the high cost of labor, manufacturers may try investing more in improving productivity than in expanding their workforce to raise output. Thus, production could increase at a faster pace than job growth in the long run.

Based on these questions, an answer of “higher” (or longer for delivery times) is given one point, the “same” is allocated half a point, and “lower” (or shorter) gets no points. NTC Economics compiles the numbers from individual European countries and comes up with regional composite indexes that are part of the Eurozone Manufacturing PMI. The  methodology is standardized for all the countries, and the results are presented in the form of a diffusion index. A reading of less than 50 indicates a contraction of activity, above 50 points to an
expansion, and an index of exactly 50 says that no change has occurred.

On top of that, a composite index is calculated. That index is made up of a weighted average of five (of the six) key topics and is based on the following formula: the new orders response is
given a 30% weight, output 25%, employment 20%, supplier delivery times 15%, and stocks of items purchased 10%. You’ll notice that the PMI index on prices is left out of the equation. Though input prices are a very good leading indicator of producer price inflation, changes in prices can occur for many reasons that have nothing to do with the business cycle. Strikes, currency movements, restrictions in supplies by foreign producers, and bizarre weather all influence input prices of raw materials regardless of the pace of economic activity. As a result, the change in price data is excluded from the total survey index.


How US unemployment is calculated (read the complete information at the US Bureau of Labor Statistics - link below)

Who is not in the labor force?

Labor force measures are based on the civilian noninstitutional population 16 years old and over. Excluded are persons under 16 years of age, all persons confined to institutions such as nursing homes and prisons, and persons on active duty in the Armed Forces. As mentioned previously, the labor force is made up of the employed and the unemployed. The remainder—those who have no job and are not looking for one—are counted as "not in the labor force." Many who are not in the labor force are going to school or are retired. Family responsibilities keep others out of the labor force.

A series of questions is asked each month of persons not in the labor force to obtain information about their desire for work, the reasons why they had not looked for work in the last 4 weeks, their prior job search, and their availability for work. These questions include:

  1. Do you currently want a job, either full or part time?
  2. What is the main reason you were not looking for work during the LAST 4 WEEKS?
  3. Did you look for work at any time during the last 12 months?
  4. LAST WEEK, could you have started a job if one had been offered?

These questions form the basis for estimating the number of persons who are not in the labor force but who are considered to be "marginally attached to the labor force." These are persons without jobs who are not currently looking for work (and therefore are not counted as unemployed), but who nevertheless have demonstrated some degree of labor force attachment. Specifically, to be counted as "marginally attached to the labor force," individuals must indicate that they currently want a job, have looked for work in the last 12 months (or since they last worked if they worked within the last 12 months), and are available for work. "Discouraged workers" are a subset of the marginally attached. Discouraged workers report they are not currently looking for work for one of four reasons:

  1. They believe no job is available to them in their line of work or area.
  2. They had previously been unable to find work.
  3. They lack the necessary schooling, training, skills, or experience.
  4. Employers think they are too young or too old, or they face some other type of discrimination.

Additional questions about persons not in the labor force are asked during each household's last month of its 4-month tenure in the sample rotation pattern. These questions are designed to collect information about why these people left their previous jobs, when they last worked at a job or business, and whether they intend to look for work in the near future. (read more)

Last modified on Tuesday, 03 July 2012 16:01

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