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‘Partly Booming’ European Services Puts ECB In ‘Sticky’ Situation
Activity in Europe's services sector is picking up rapidly. Whether that's a good thing depends on the read-through for inflation.
The flash read on S&P Global's services sector PMI for the European economy in April was 56.6, data released on Friday in conjunction with Hamburg Commercial Bank, showed. That was a 12-month high.
The composite gauge was likewise buoyant, at 54.4. There's now a very wide disparity between the fortunes of services businesses and factories.
The manufacturing
There’s also a bit of a trick to keep in mind with service employee data. Manufacturing is not a monolithic sector. The services sector and the manufacturing sectors are artificially divided by what a company seemingly does. No one would argue against GM or Deere being manufacturing businesses. In fact, the vast majority of the employees at firms like this are actually service workers — accountants, engineers, IT folks, HR folks, etc. These are all people who make no physical goods. At Deere the actual manufacturing labor force is about 10% of the total. Everything else is service infrastructure, which employs people who could just as easily be working at Schlumberger, or one of the big four accounting firms or at Robert Half, for example. Wages for these folks are at least similar to service workers at firms classified as manufacturing and included in that data. If pure service firms start having to pay more to get the accountants they need, so will manufacturing firms that want to hire those same people. Manufacturing is really two different worlds as far as wage inflation goes and the aggregation of their payrolls into one lump can easily distort the seeming trends between the two broad sectors, something which is rarely, if ever, studied.
Thanks Lucky One. Great point. That’s obvious but overlooked by most of us, even me!