European Economic Conditions Worsen: Not Good For U.S. Firms

Includes: EWG, EWGS, GERJ
by: John M. Mason

One of the major things to note in the earnings reports of many United States companies is the weakness they are feeling from revenues received outside the United States, especially from Europe. And they are projecting continued weakness into the future.

The newly released data on European manufacturing confirms this weakness and gives little hope for improvement in the near future.

The Purchasing Managers Index (PMI) for eurozone manufacturing and services dropped to 45.8 in October from the September level of 46.1. Note that anything below 50 represents a contraction. So, dropping further below 50 means that the contraction is getting more severe.

Howard Archer, a European economist at HIS Global Insight is quoted as saying,

The October manufacturing and services purchasing managers surveys worryingly indicate that the eurozone downturn is, if anything, deepening rather than easing.

(This is reported in the Financial Times.)

Most worrisome of all is the fact that the German index dropped by an amount that was greater than expected. The German index for manufacturing and services unexpectedly declined from 49.2 in September to 48.1 in October.

Furthermore, business sentiment in Germany continued to decline. The Ifo Institute provides a business climate index. The Institute questions 7,000 companies. In October the business climate index in Germany fell for the sixth straight month, dropping from 101.4 in September to 100.0 in October.

Some of Germany's situation can be explained by the slowdown in China and other economies in the world. Germany exports more to China than it exports to Ireland, Greece, Portugal and Spain combined.

Hopes for a German recovery extends to the possibility that China and the other non-European countries Germany exports to will pick up economically in the near future and help Germany maintain the economic growth that Germany needs to maintain in order to prop up the European Union.

The information released by Spain on Tuesday certainly does not indicate that Germany will get any help from other eurozone countries in the near future.

The Bank of Spain released data that indicated that Spain's GDP dropped 0.4% in the third quarter of 2012 from the second quarter. This is the fourth quarterly drop in real GDP growth of the Spanish economy. Year-over-year, the economy fell by 1.7%, down from a 1.3% drop in the second quarter.

In addition, information relating to France and Belgium business prospects also are coming in gloomier.

So, the earnings reports of many U.S. global companies that do business in Europe are just reinforcing the information we are getting from Europe and European businesses.

More and more eyes turn to the health of the German economy to maintain some kind of economic stability for the continent. One must ask the question of how much of this burden can the Germans bear for more than just economic health rests on the shoulders of the Germans.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.