Why Do Those Euro Zone PMIs Matter?

Unlike the Hunger Games movie which garnered plenty of rave reviews in its opening week, this month’s set of euro zone flash PMIs turned out to be a huge flop. What exactly do these figures measure and why do they matter?

PMI, which stands for purchasing managers’ index, is basically an indicator of business conditions in an economy. It takes into account the various factors affecting the industry, such as the level of employment, production, new orders, inventories, and deliveries then rolls it up into one neat figure. That makes it easier for traders like you and me to gauge whether businesses are doing well or not.

A PMI reading that is higher than 50.0 means that the industry is expanding. In other words, business is good yo! On the other hand, a PMI reading below 50.0 implies that the industry is contracting.

Since business activity comprises a sizeable chunk of an economy’s GDP, an industry contraction could knock off a few points from overall economic growth. With most of the euro zone PMIs hinting at a slowdown in the manufacturing and services industries, several analysts began to worry that the region could chalk up another quarter of negative growth and find itself back in a recession.

You see, the manufacturing PMIs in Germany and France, euro zone’s top two economies, landed below the 50.0 level while the services PMIs of both countries fell short of expectations. Overall, the euro zone manufacturing PMI slipped from 49.0 to 47.7 and its services PMI dropped from 48.8 to 48.7 this month. Even Robopip got goosebumps from these figures, and that’s saying a lot since he’s made of metal!

Recall that the euro zone already shrank by 0.3% during the last quarter of 2011, and these bleak PMIs led some economists to predict that another negative GDP figure might be in the cards for the first quarter of this year. Estimates range from a mild 0.1% contraction to a substantial 0.5% drop in GDP, but it’s pretty clear that a potential double-dip is something that we should brace ourselves for.

Just when it seemed that the resolution of the Greek debt drama signaled that the worst was over for the euro zone, another round of economic problems appear to be waiting in the wings. Bear in mind that several euro zone governments are set to implement more austerity measures, and these are likely to hurt overall economic growth as well.

As for the euro, it appears that the longer-term EUR/USD downtrend is still very much intact:

EUR/USD Daily Chart

As you can see from the chart above, a head and shoulders pattern seems to be forming right on the falling trend line, suggesting that the pair is ready to move lower. The recently released PMIs revealed that fundamentals aren’t exactly in favor of the euro as well but, as always, I’d still keep an eye out for any updates and consult Pip Diddy’s economic roundups to figure out what’s next for the euro.