30/8/2013: How's that 'credit supply' to the economy promise going?

On foot of my analysis of the credit extended to Irish Private Sector Enterprises and to SMEs (see PSEs analysis here and SMEs analysis here), I was asked if I can pool together the two datasets to provide a summary of the 'Government performance table' on both.

Here it is. All changes are referenced to Q2 2011 in levels (Euro millions) and the colour codings are: bold green marks expansion on Q2 2011, bold red - contraction.

As you can see, only two sectors of the economy experienced an overall increase in credit levels: Manufacturing and Human Health & Social Work.

As I noted in the previous post: Truth be told, neither this nor any other Government can stop the deleveraging in the Irish private sector economy and this deleveraging will have more adverse impact on SMEs than on larger enterprises. But, truth be told, the Irish Government is not exactly keen on this truth and is insisting that it can 'unlock' credit flows... Two years in, we are still waiting...

29/8/2013: Credit to SMEs in Ireland: Q2 2013

Earlier today, I debunked the myth that we are experiencing any sort of significant uptick in private sector enterprise investment on the foot of poor credit supply figures for Irish private sector enterprise. You can read my analysis on this here: http://trueeconomics.blogspot.ie/2013/08/2982013-credit-to-private-enterprises.html. However, let us recall that the current Government came into the office rattling sabres on the high goals of setting banks straight on SMEs credit.

How are we doing on this front?

Here's a handy summary for Q2 2013 changes in credit outstanding to the SMEs (green bold marks sectors where there has been any improvement - either quarterly or annual):

Spotting any significant improvements in access to credit? Me neither.

What about longer trends? Here are the charts:

Total credit is down.

Manufacturing credit is up and off the bottom levels, but the overall levels are tiny, minuscule, irrelevant to the aggregate economy. Primary sectors credit is down over longer time range and flat since ca Q2 2011.

No love from the banks for property, construction, and now less love for financial intermediaries too.

No need to describe what's going on in wholesale, retail and hospitality sectors.

Education faring better, but at insignificant levels of activity to start with. Health is at the bottom of the empty swimming pool and not even flapping arms...

Even the 'white knights in shining armour' that are exports drivers and generators and the darlings of our development agencies: business services and ICT are starving of credit.

So run by me again: what are the banks doing to respond to the Government loud calls to do their bit for the economy, to support recovery etc? Oh, here's a table showing what happened in SME credit per sector since Q2 2011 (in bold red - sectors that saw decline in credit, in bold green - those where there was an increase in credit):

Truth be told, neither this nor any other Government can stop the deleveraging in the Irish private sector economy and this deleveraging will have more adverse impact on SMEs than on larger enterprises. But, truth be told, the Irish Government is not exactly keen on this truth and is insisting that it can 'unlock' credit flows... Two years in, we are still waiting...

29/8/2013: Credit to Private Enterprises in Ireland: Q2 2013

Credit supply figures for credit extended to Irish businesses are out and make a depressing reading, once again.

Taken from the top, here's the summary of all latest (Q2 2013) changes:

I marked in green bold only those observations where there has been any sort of a positive movement either y/y or q/q. There are only five such subsectors: Water, Sewage & Waste Treatment, etc (although q/q the sector is again down on credit), Transport & Storage (although the sector is down y/y), Information & Communication (solid y/y rise, with a big question as to whether the credit increase is accounted for by the Eircom going back into leveraging up), Education (solid y/y gain, weak q/q growth) and Health and Social Work (down q/q, but up y/y).

We hear much about the fabled revival of fortunes in the construction sector and property investment sector. I am afraid there is none visible in the credit supply data:

Unless Russian oligarchs with suitcases of cash are rolling into town, where's the fabled 'pick up of building activity' being funded from? Mars? Or cash piles of our farmers?

Total credit is still shrinking, most critically, in the sectors excluding Financial Intermediation and Property:

Credit in Primary Industries and Manufacturing has flat-lined some 33-39 months ago and is showing no life since, which is sort of suggests that the PMIs (Manufacturing) 'boom' is a signal of skewed PMI metric, capturing more of the MNCs than of domestic activity:

When it comes to the 'brighter' spot of Transport - credit pick up is off extremely weak position:

In short, as credit is linked directly to investment activity, the above suggests continued deep-freeze in the economy through H1 2013. There seem to be no signs of revival so far, albeit caveats to this apply - this is just one indicator and it is an indicator that does not tell us much about new loans issuance as opposed to old loans expirations/maturing etc. Still, to get investment-driven growth, we need credit figures to rise. Not fall...

1/7/2013: Irish Manufacturing PMI: June 2013

Irish Manufacturing PMI is out today and I can't really report much on the subject - the Investec - Markit continue to put out qualitative analysis in place of what used to be very informative press releases.

The PMI data is seasonally adjusted, which makes y/y comparatives slightly questionable, while normal volatility makes m/m comparatives pretty much meaningless. Note: despite the seasonal adjustment data remains Laplace-distributed. In the past, it was possible to make some educated guesses as to the underlying drivers of the PMI by looking at trends in components. Now - it is impossible.

But ok, let's deal with the headline PMI alone.

The headline PMI reading is not as ugly in June as it was in March and April (PMI average at 48.3), but not pretty either.

We have a statistically insignificant rise in the overall index reading of 0.6 points (bi-directional standard deviation for this data is at 4.37 for full sample, 4.28 since 2000 and 5.21 since 2008).

The increase brings us notionally above 50 to 50.3, for the first time since February 2013, but
1) This is not a reading that is statistically significantly different from 50.0 (STDEV is at 2.19 for difference from 50 and the skew is -1.46, so 0.3 is not significant)
2) Current reading still remains consistent with negative trend set on around 12 months ago. Next 1-2 months will be critical in either confirming the trend or potentially signalling an inflection point. Then again, next 1-2 months will be peak of summer, and will be unlikely to tell us much.
3) 50.3 reading in June is identical to January 2013 and is below 12mo MA of 50.9, and is about identical to the 3mo average through March 2013 at 50.1. 3mo average reading through June is below 3mo averages through June in every year 2010, 2011, 2012.

Core conclusion: output did not, in any normal statistical likelihood, return to growth yet, although PMI reading did come to around 50 from the upside (50.3)… it was also around 50 back in May (49.7) but on the downside.

Per Investec, there was "a further reduction in new orders, although the latest decrease was only fractional, and the slowest in the current four-month period of decline. New export orders, meanwhile, fell at a faster pace than in May." We, of course, have no idea just how far these reductions have taken the two sub-indices, because Investec and Markit are no longer giving us actual sub-index readings.

Charts on dynamics:

3/5/2013: Irish Services PMI April 2013: Some good, some make-believe news

For a change from the declining fortunes of Irish manufacturing (aka, production of at least some real tangible stuff by humans, albeit richly peppered with tax arbitrage), the accounting trick called Irish Services (aka, billing of services sold in Mongolia to Dublin by companies minimising tax exposures in the US) is booming.

Good news for GDP. Good or bad news (depending on capex cycle and financial engineering - as exhibited by Apple 'bond' offer this week, etc) for GNP. Even better news for the Government solemnly incapable of supporting growth at home, and thus solely reliant on Mongolian demand for 'Irish' services and Obama administration lag in realising that another corporate tax amnesty is long overdue (note to the White House: check out Ireland's IFSC deposits).

Latest NCB Services PMI for Ireland published today show continued expansion in Services sector:

• Headline Services PMI rose from 52.3 in March to 55.2 in April - statistically significantly above 50.0 for the first time since January 2013. This marks ninth consecutive monthly reading above 50.0, and sixth time the index is above 50 with statistically significant margin.
• Good news: this time around there was significant growth signaled in Transport, Travel, Tourism & Leisure sector (potentially due to twin effects of The Gathering and the EU Presidency - which should really count as subsidy activities this year). However, another significant driver in upside growth were Financial Services (aka IFSC). Business Services and Technology, Media & Telecoms services both recorded moderation in the rate of growth, as signaled by PMI.
• On dynamics side, 12mo MA through April 2013 for Business Activity headline index now stands at 53.3, with 3mo average at 53.7. Both are below 3mo average through January 2013 which stood at 56.2, so there is still some slowdown in the rate of growth. Latest 3mo average is ahead of same period 3mo averages for 2010-2012.

Per last chart above, 

• New Business sub-index remained practically unchanged at 54.2 in April, compared to March (54.1) with both months posting reading statistically above 50.0 - which is good news.
• On dynamics side, 12mo MA was at 53.7 in April 2013 - a healthy reading, with 3mo MA through April 2013 almost bang on at 12mo average level of activity at 53.8. Previous 3mo average through January 2013 was at blistering 56.5, so there is some marked slowdown in the rate of growth. Nonetheless, last 3 months marked the fastest growth for the same three months period for any year since 2010.
• April 2013 was the ninth consecutive month of New Business sub-index readings above 50.0, with seven of these months posting readings statistically significantly above 50.0.

I will blog separately on employment and profitability in both services and manufacturing so stay tuned for details on these.

Business confidence and New Export Business sub-indices both showed some slowdown in growth, but still remain in rude health. On foot of this, employment growth rate improved:

Overall, sarcasm aside, the Services sectors continued to support economic growth, even though much of this growth is coming from the make-believe tax arbitrage stuff. Still, better have make-believe dosh than none at all. And a welcomed reprieve from the past years' trials for the Travel & Toursim sector too.

One note of caution, though: Irish Services PMI have little to do with Irish Services actual activity levels... see here: http://trueeconomics.blogspot.ie/2013/04/742013-irish-services-activity-index.html

1/5/2013: Not pretty and getting uglier: Irish Manufacturing PMI April 2013

Another unpleasant print of NCB Manufacturing PMI for Ireland was out today, marking broad-based, deepening contraction for the second month in a row and for the third month in last four.

Here are top figures:

Overall Manufacturing PMI declined to 48.0 in April 2013 from 48.6 in March, marking second consecutive monthly fall and reaching the lowest level since September 2011. It is worth noting that the current reading is statistically significantly below 50.0, but that the last two months of decline came on foot of 12 months of consecutive expansions through February 2013. Nonetheless, 3mo average through April 2013 is now down to 49.4 against 3mo average through January 2013 at 51.4, and current 3 mo period marks the lowest average reading compared to same period 2010-2012.

Overall, recovery was short, shallow and predominantly trending down, with most significant sub-indicators now below 50. As chart above shows:

• Output index contracted sharply from already statistically significant contraction of 48.1 in March 2013 to 46.5 in April. 3mo average through April is at 48.6, with April reading being the lowest recorded since August 2009 and previous 3mo periods average through January 2013 at 52.2, a 3mo average swing of massive 5.7 points. Current 3mo average is the lowest (and the only one below 50) for any same-period reading from 2010 through 2013.
• New Orders sub-index fell to 48.4 from 49.1 in March, with 3mo average through April at 49.4, below 3mo average through January 2013 at 50.8. New Orders are currently running at the fastest rate of contraction since January 2012.
• New Export Orders index posted slower rate of contraction at 49.2 in April, compared to brisk decline of 47.6 recorded in March 2013. 3mo average through April 2013 is at 49.0 against 3mo average through January 2013 at 52.2. In Q1 2013, New Export Orders index was running on average at 49.53, so the current index reading signals continued slowdown on the Q1 already poor showing, same as with New Orders sub-index.

Structurally over time, both New Orders and New Export Orders are on downward momentum sub-50 and are seeking confirmation to the downside:

Input prices and output prices are trending down, but inputs are still inflating, while outputs are still deflating, which means profit margins continue to shrink, albeit at moderating pace, compared to March 2013:

Of course, profit margins here are relative, since much of our Manufacturing PMI is skewed to reflect MNCs activities. These activities - as I wrote before - are predominantly on transfer pricing side, so booking higher inputs costs against lower output costs improves tax arbitrage.

In the chart above, Employment sub-index posted a worrying two-months consecutive slip:

• Employment sub-index fell to 46.9 in April from already steeply contractionary 47.2 in March. April marks the lowest sub-index reading since September 2011. 3mo average through April is at 48.9 against 3mo average through January at 52.1 and Q1 average of 49.8. Reminder: Q3 and Q4 2012 saw employment sub-index averaging 52.8 and 52.9 respectively, which implies a swing of 5.9 points to April 2013 from the end of 2012.

Lastly, my own Composite Current and Forward indices, re-weighting exports contributions and profitability conditions into overall PMI:

• Composite Current conditions indicator fell to 47.2 in April from 48.3 in March, with April reading statistically significantly below 50.0. The deterioration is broad on 3mo average basis and quarterly averages basis. The index is now at the lowest reading since August 2009!
• Composite Forward conditions indicator posted another (second consecutive) monthly contraction at 48.8 in April, which is marginally shallower than 48.4 contraction in March 2013. The reason for this is that the index is clearly tracking some of the forward activity, suggesting that conditions will ease slightly in months to come, but will remain in the 'negative headwinds'.

With both Current and Forward Composite Indices tracing close to (and even breaking) the lower bound of statistical significance, Irish Manufacturing activity seems to be heading for some rougher seas in months ahead. Granted, volatility can easily return things back above 50, but the dynamics overall are not pretty.

3/4/2013: Irish Manufacturing PMI: March 2013

Manufacturing PMI data from NCB and Markit released yesterday was a bit of a disaster, mitigated only by the fact that Ireland's performance was in line with the abysmal reading for the entire euro area.

Headline seasonally adjusted Manufacturing PMI fell from 51.5 in February (indicative of a reasonably marked expansion, albeit still not statistically significant) to 48.6 in March (statistically not significant contraction). The swing of 2.9 points was the largest since July-August 2012. This was the first sub-50 reading in PMI since February 2012.

12mo MA is now at 51.4 against 6mo average of 51.1. 3mo MA is running at 50.1 and is substantially down on 3mo average through December 2012 (52.0). This compares favourably to 49.8 3mo average through March 2012, but is well below 56.1 average for 3mo period through March 2011 and marginally ahead of 3mo average through March 2010 (49.9).

Index volatility is running well above historical levels at 2008-present stdev at 5.33 against historical stdev of 4.40.

Output sub-index fell from 51.3 in February 2013 to 48.1 in March 2013, marking the lowest reading since January 2012 and the first sub-50 reading since April 2012. 12mo MA and 6mo MA are both at 51.7, with 3mo MA at 50.3 against previous 3mo MA at 53.1.

New orders sub-index also fell below 50 line with February 50.8 weak expansion slipping into contraction territory at 49.1 in March. Once again, this was the weakest reading since January 2012.

New Export Orders came in at 47.6 - a sharp contraction and a massive fall on 50.1 in February, signalling the worst performance since August 2009. 12mo MA is now at 51.9, with 6mo MA at 51.0 and 3mo MA at 49.5 (previous 3mo MA was at 52.5, implying a 3.0 point swing down). Current reading is statistically significant sub-50 reading.

As you know, I compute current and forward-looking composite indices of activity.

Current Composite PMI reading is at 48.3 in March, down from 51.4 in February and marks the lowest reading since January 2010. Forward Composite PMI reading is at 48.4 - the worst performance since December 2011 and down on 50.5 reading in February.

Output prices fell at 48.2 in March, same as in January and down from expansion at 51.2 in February 2013. Meanwhile, input prices inflation moderated, but remained robust at 54.8 in March, down from 57.1 in January and February. Thus, overall profitability fell. In last 24 months, profitability rose in the sector in only one month.

Employment fell sharply to 47.2 in March against expansion of 52.7 in February. March reading was the lowest since October 2011.

Overall, the PMI for manufacturing sector was a disaster!

5/3/3013: Irish Services PMIs: February 2013

Irish Services PMI (published by NCB) for February were out today, highlighting some interesting (for a change) shifts in the short-term trends worth discussing.

The headline numbers were good, although less strong than those recorded in January. This is not surprising since PMI surveys are biased toward multinationals in some core driving sectors (due to weighting factors attached to sectors and the overall quality, collection and reporting of data biases).

• Seasonally-adjusted Business Activity (headline index) declined to 53.6 in February from 56.8 in January 2013, but remained above 50.0 line. 
• 12mo MA through February 2013 was 53.0, which is not statistically significantly different from 50.0, but nonetheless represents a reading consistent with moderately strong expansion of activity. This marks the seventh consecutive month of readings above 50.0 although February was the second slowest month for activity over this latest period of consecutive expansions.
• 3mo MA through February is now identical to the previous 3mo MA through November 2012 - both at 55.4. For comparative purposes: 3mo MA through February 2010 was 47.2, through February 2011 - 52.1, through February 2012 - 50.0, so annualised activity is running ahead of previous 3 years.
• Main point to be made in the above is that since roughly April 2010, we have been trending along a new late- or post-crisis trend along the average of 52.1 average (49.6 to 54.6 range) as compared to May 2000-December 2007 average of 57.6 (52.5 to 62.7 range). As charts above and below clearly show, the new trend is (1) lower and (2) less steep in take-offs from the local minima (lows). In my view - this shows two factors: Factor 1: overall slower rate of growth (do keep in mind that the current trend is coming off historical lows of the Great Recession and should be consistent with much faster uplift and higher average and range than pre-crisis trend), and Factor 2: more mature nature of business in Irish Services sectors (with ICT and Financial Services now in advanced stages of late investment cycle compared to the period of 2000-2007 when these were growing rapidly and posting recovery from the dot.com bubble).

Now on to some of the components of the headline index.

• Chart above shows that New Business sub-index also posted moderation in the rate of growth in February 2013 compared to five months of robust expansion prior to February. In fact, February reading of 53.1 was the slowest pace of expansion in seven months, although it does come on foot of seven months of consecutive above 50.0 readings. 
• Trend-wise, the same conclusions that were drawn in the last bullet point on the headline index - those relating to structurally slower pace of growth in the recent years compared to pre-crisis rates of expansion - continue to hold for New Business sub-index as well. Since April 2010, the sub-index averaged 51.3 (range of 48.4 to 54.2) against pre-crisis (May 2000-December 2007) average of 57.4 (range of 52.4 to 62.5).
• On short-term dynamics, 3mo MA through February 2013 stood at 55.4, slightly down on 55.8 3mo MA through November 2012, but ahead of 47.2 3mo MA through February 2010, ahead of 52.1 3mo MA through February 2011 and ahead of 50.2 3mo MA through February 2012.

Chart below summarises the shorter-range data for the two core indices.

Two charts plotting other principal components of the overall index:

Focusing on few sub-series of interest:

• Employment sub-index remained above 50.0 in February, posting a reading of 52.5 - the shallowest expansion since September 2012, but marking a sixth consecutive month above 50.0. 3mo MA now is at 54.1 and previous 3mo MA through November 2012 was at 53.0. Good news - in 2009-2012 3mo MA through February was below 50.0 in every year. Bad news is that Employment is closely linked with Profitability (see below).
• Business Confidence / Expectations 6mo out are continuing to fly high, propelled most likely by a combination of current upbeat conditions (the two series: Expectations and Current Conditions show the strongest co-determining relationship of all series, suggesting that the real driver for Expectations is not actual anticipation of the future events, but rather firms' assessment of current conditions) and by the endless barrage of feel-good propaganda from the business lobby and the State. The last, third factor, is human nature (aka 'winner's curse' bias). We expect things to get better because they were pretty damn awful until now and for a very long time... Come on, folks, let's face the music - unless you are a transfer-pricing arbitraging MNC, things are hardly getting any better. And, unless you live in the world of Googlites (aka 25-30 year olds with no attachment to anything save a party on a weekend) you are facing a mountain of debt, shrinking assets and wealth, higher taxes and the prospect of more of the same. What 'confidence at 69.1' can we have in mind? 
• Oh, and to top things up - you'd think that Confidence comes from higher profits for the firms... Well, in the Wonderland of Transfer Pricing it is not and hence in Ireland we have Services sector where profitability is shrinking (41.5 in February on 49.2 in January) for 62 consecutive months now (since January 2008, every month there was negative profitability growth, with the average shrinkage at 41.9 - aka very very very deep contraction), but businesses confidence has been up on average at 60.9 - aka very very strong confidence growth on monthly basis).

If anything, aside from the major trend outlined in the first set of bullet points above, the point on Confidence and Profitability is the second main conclusion from the longer-term data analysis, for it exposes the surreal nature of the Irish economy - economy distorted by extreme transfer pricing and tax optimisation activities of the MNCs.

Now, let's touch briefly on the main short-term observation from today's data release: the core drivers for each of the main sub-series:

• When it comes to Business Activity index, level support at 53.6 in February was provided by a broader base of sectors, with Technology, Media & Telecoms sector (TMTS) posting comparable expansion to Transport, Travel, Tourism & Leisure sector (TTTLS). This is similar to what was observed back in October 2011 and is an improvement on the trend that (at least over the last six months) have seen TMTS being the main and dominant driver of the index improvements.
• Business Activity Index for Expectations out 12 months ahead was dominated (as in every one of the previous 6 months) by TMTS, with Business Services Index coming in as the second upside driver (same as in January 2013).
• TMTS was the main driver for the third consecutive month behind growth in Incoming New Business, while Financial Services were the main driver over the last 4 months behind the growth in the Incoming New Export Business.
• In Employment generation, TMTS again outstripped all other sectors for the third consecutive month, which, of course, means we are only reinforcing the demographic misalignment emerging in the economy with main generation of new jobs taking place in sectors that are more reliant on importing skills from abroad.
• TMTS was the only sector in which profitability improved in February 2013 (same as in December 2012 and January 2013). In all other sectors, profitability was in decline for the third consecutive month. Why, you might ask? Interestingly, TMTS saw the sharpest countermovement in input/output prices, with input costs posting sharpest acceleration in February, and output costs posting the sharpest deterioration. In any normal economy that would mean shrinking, not expanding, profit margins. But in Ireland, of course, there is little normal about the TMTS sector dominated by the massive MNCs aggressively using their Irish activities for tax arbitrage from their European and even global operations.

Some interesting stuff, eh? You bet official 'analysis' of Irish PMIs is not talking about any of this...

6/2/2013: Irish Manufacturing PMI - January 2013

Last night I wrote briefly about the Services PMI for January for Ireland (see post here and an added post on the longer term link between PMI and Services Index here). Going over the database, however, made me realise that I have not posted on the latest Manufacturing PMI figures for January, so correcting this, here's the analysis.

Headline seasonally adjusted Manufacturing PMI posted a decline from 51.4 in December 2012 to 50.3 in January 2013, leaving the index notionally above 50.0 line for 11th month in a row. Alas, 50.3 is not statistically significantly different from 50.0 and in total out of the 11 months of consecutive notional readings above 50, in reality only 3 months posted readings that are significantly distinct from 50.0 zero-growth line.

Dynamics are flat at just around 51.5 (also not statistically distinct from 50.0), with 12mo MA at 51.5, 3mo MA at 51.4 and previous 3 mo MA at 51.6. This, however, compares relatively positively with 3mo MA through January 2012 (48.5) and 3mo MA through January 2010 (48.6) although the current 3mo MA reading is below 53.1 reading for 3mo MA through January 2011. 6mo MA is 51.5.

In brief - growth is sluggish and lacking a catalyst.

Charts:

Per above, Output index posted a slight rise in headline reading from 51.2 in December to 51.5 in January, marking 9th consecutive month of above 50 notional readings, with just 4 of these months posting readings statistically consistent with being above 50.0. 3mo MA was at 52.2 in 3mos through October 2012 and is at 52.2 in 3mo through January 2013. It is bang-on in line with 12mo MA of 52.1 and is identical to 52.2 6mo MA.

New Orders sub-index posted surprise contraction to 49.5 (not statistically distinct from zero-growth, so a very shallow contraction if any) in January from shallow growth of 50.9 in December. 12mo MA is at 52.0, with 3mo MA through January 2013 at 50.8 and 3mo MA through October 2012 at 52.3, marking a clear slowdown in growth over the last 6 months. That said, January 2013 was the first sub-50 reading in the series since January 2012.

New Export Orders posted slower rate of expansion at 50.9 in January 2013, down from 53.6 in December 2012. Again, as above, 50.9 is not statistically different from 50.0, although 53.6 was clearly statistically above 50.0. January 2013 reading was the weakest in 4 months and the second weakest in 11 months. 3mo MA through January 2013 is at 52.2, above 51.2 3mo MA through October 2012, 6mo MA at 51.7 and 12mo MA is at 52.5, so by all averages, January came in relatively weak.

Other series summed up in the charts below:

Output prices posted a clear decline in January 2013 (48.2) after posting a mild expansion (and a surprise one) in December 2012 (51.3). Overall, in last 24 months, only 9 months posted notional above 50.0 readings, when it comes to output prices. Meanwhile, input prices continued to inflate, with index reading of 57.1 in January 2012 being somewhat lower than 59.9 in December. In last 24 months, there was only one instance when input prices inflation was negative. All of which does not bode well for profit margins: in 3 mo through January 2013, average input prices inflation was consistent with 58.7 and in 3mo through October 2012 it stood at 59.4. At the same time, output prices were contracting by 49.7 in 3mo through January 2013 and were expanding at a slower pace than inputs costs were inflating (51.7 vs 59.4) in 3 months through October. In other words, profitability has been shrinking, on average over last 6 months and indeed over the last 12 months.

Now onto composite measures of current and future activity. These are computed based on my own formula, so not a part of NCB-released data. The Current Composite index is based on a  weighted average of Output and headline PMI index, relating current PMI to Output, as opposed to changes in stocks of goods and purchases orders. The Forward Composite Index is based on a weighted average of New Orders and New Export Orders, weighted relative to each series correlation to headline PMI. As such, both indices attempt to remove impact of temporary factors on underlying activity.

Current Composite Manufacturing PMI (CCM index) fell from 51.3 in December 2012 to 50.9 in January 2013, with overall notional levels above 50 recorded now in 9 consecutive months. However, statistically, the CCM Index was above 50.0 in only four out of the last 12 months. Forward Composite PMI (FCM index) also slipped in January from 52.2 in December 2012 to 50.2. Above 50.0 notional readings were now recorded in 11 consecutive months, although only four months posted readings statistically above 50.0.

On the net, the indices mark significant slowdown in current and forward activity, although current readings are consistent with progressing weak recovery (statistically indifferent from stagnation). Given overall global improvements in sentiment and trade, this can represent simply a lagging effect to global growth (upside potential) and / or drag on Irish activity from the Euro area and the UK economies weaker-than-global performance (downside potential).

5/2/2013: Irish Services PMI for January 2013

The latest data from Services PMIs - released this am - is full of positive news. In this light, it is both hard and, perhaps, unjust to rain on the parade with detailed analysis of hypotheticals. But, alas, this is what needed for the dose of reality check.

Before we do, here are the straight forward numbers.

Overall headline Business Activity index rose to 56.8 in January 2013 from seasonally adjusted 55.8 in December 2012 - a strong level of activity that marks the highest index reading for any month since August 2007 when the index reached 57.0.

This is the good bit. And it gets even better when we consider 3mo MA to smooth out some of the monthly index volatility: current 3mo MA stands at 56.2, ahead of previous 3mo MA through October 2012 of 53.9. Year ago, 3mo MA was at contractionary 49.8 and in 2011 the same period 3mo MA was at 50.7 against 2010 3mo MA through January reading 46.5. In other words, we have solid increase in 3mo MA, which is more sustainable reading than monthly series.

12mo MA is at robust 53.0, implying that last 6 months have seen, on average, stronger activity in the sector (55.1) than February-July 2012 (50.9). Also good news.

Chart to illustrate:

Per chart above, Business Activity expansion was backed by New Business Index growth. New Business Index reading reached 56.6 in January, up on already strong reading of 56.4 in December. However, unlike overall activity, new business expansion was not as dramatic in historic terms, with January marking third fastest rate of expansion in 6 months. 3mo MA through January 2013 stood at 56.5 - faster than 54.5 3mo MA through October 2012. In 2012, same period 3mo MA was 49.9 and in 2011 it was 47.6, while in 2010 it was 46.8, which means that the last 3mo MA expansionary reading (and strong one at that) is the first expansionary reading in 4 years.

12mo MA for New Business Activity is now at 53.4, with last 6mo MA at 55.5 against first 6mo MA at 51.3, suggesting that New Business Activity is a major driver behind Overall Business Activity acceleration in the last 6 months.

Chart below shows snapshot of both indices over shorter period of time, allowing for better understanding of the underlying short term trend:

The close coincidence in series since November 2011 is indicative that sector activity is gaining momentum on foot of New Business Orders (as opposed to jobs inventories and backlogs) and trend acceleration since July 2012 also shows sustained momentum.

All of this is good news. And there is more. New Export Business index rose to 63.5 in January from 61.3 in December, marking the highest reading in series history with previous record of 63.3 reached in June 2006. 3mo MA through January 2013 is at 60.3, against previous 3mo MA of 55.5. This contrasts with 3mo MA through January 2012 at 52.4, 3mo MA through January 2011 of 53.1 and 3mo MA through January 2010 of 52.6.

This blistering pace of activity should, however, be treated with some concern. Now, take a look at the rates of expansion here, contrasted with rates of robust rises in Employment. Employment index rose to 56.5 in January from 53.4 in December. The Index posted above 50 readings in 5 months in a row and 3mo MA for the index is now at 54.6, up on previous 3mo MA of 51.3. Over the last 6 months, thus, employment in services sector have expanded rather rapidly.

Meanwhile, profitability in the sector continued to contract: Profitability Index (I compute my own for comparative analysis with Manufacturing, but let's stick to 'official' Profitability reading for now) remained well below 50, at 49.2, marking 62nd consecutive month of contracting profits in the Services sector.

Now, ask yourselves a simple question: 62 months of uninterrupted collapse in profits, plus over the same period 11 months of expanding employment, plus 21 months over the same period of rapidly growing exports, equals what? How can catastrophically less and less profitable business retain relatively robust employment levels and expand dramatically exports? Oh, well, the answer to this dilema is a simple, but unpleasant one - most of our services activity (and roughly speaking 90% of our services exports activity) is dominated by the tax-optimising MNCs. In other words, while the headline numbers are rosy, the underlying reality is probably less tangible to the Irish economy than we would like to believe. Employment growth in these MNCs-led sectors is primarily focused on importing skills (so no effect of reducing unemployment), while shrinking profitability in the Business Services sector and Transport, Travel, Tourism and Leisure sector (which led in profitability decline) means lower revenues for the Exchequer and lower indigenous employment.

One thing Irish Stuffbrokers issuing upbeat reports on PMIs basis are too lazy to check is the composition of what they are talking about at the aggregate levels. Here's a simple snapshot of employment increases over the last 6 months, reported in the PMIs:

Contrasted by 6mo data for profitability:

And contrasted again by New Export Business figures:

It turns out, on average, over 6 months, the ENTIRE range of PMI-covered services subsectors have managed to post increases in employment, and even mor robust rises in New exports, with largest rises, by far in the MNCs-dominated ICT services and Financial Services. But Business Services - the ones that are suffering from deep cuts in profits - are also posting rises in exports and employment. This is either bonkers data collection, or a severe selection bias toward MNCs with tax optimisation, not real activity on their minds.

You can see that new exports are acting to grow current employment, while shrinking profitability seemingly has no effect on current employment (current points marked in red) here:

More on profitability conditions and employment in both Manufacturing and Services PMIs in subsequent posts, but overall, the data is very positive. It is just worth asking a question just how much relevant is this data to real economic activity?