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Economy in Brief

Global Conditions Show Great Variation
by Robert Brusca  August 1, 2013

There is a great deal of variation for countries among their manufacturing sectors over the recent time horizon. Indonesia, Vietnam, the US, the UK and Canada generally have the highest values when we evaluate the standing of their current PMI index relative to its historic range. The comparison for Vietnam is not quite on the same footing as the others as its history of comparison is relatively short- back only to March 2011. Despite this drawback, that some countries have PMI data available for shortened horizons, there are some clear lessons from the table.

The comparison of global manufacturing PMI data is presented in the table above. The drawback of this dataset is that to make comparisons reasonable we need to keep the comparisons to shorter time horizon so that countries have coverage over the entire period over which they are being evaluated or at least most of it. The period over which the various percentiles are calculated is listed in the far right-hand column of the table; for the most part it is back to early 2006.

Along with naming the countries that are doing the relative best we can look to see who the laggards are...if you're a fan of the BRIC countries, in this sample they remain among the weakest. India is the relative weakest with its index sitting in the bottom 6 to 7 percentile of its historic range. Although Brazil is doing the relative best of the lot, that only means it stands in the bottom 16th to 17th percentile of its historic range. By comparison the euro-Area is in the 43rd percentile of its historic range with Germany in its 38th percentile. All of these percentile readings are below 50 which means for these statistics that they are below their respective MEDIAN VALUES for the period

These relative rankings - or queue standings- are useful for comparing countries particularly in a diverse sample like this where participants are experiencing all different sorts of circumstances. The queue method is applied to the underlying PMI values and from those values each current observation is placed in a queue of its ordered historic values. In this way the queue standing measure uses all the observations in the history of the measure over the time interval selected. As such what it provides is a good relative assessment of how economies are doing relative to their past. Some may have been fast-growing, some slower growing; whatever they are doing, queue standing evaluation of the PMI measure will provide a topical PMI measure that will evaluates the current measure by telling you essentially how frequently the PMI measure has been weaker than its current value. Low queue values are bad, high queue values are good. Countries are going to have different queue standings given the same level of the PMI variable depending on what their historic tendency has been for the period over which we evaluate. For example, Japan posted a value of 50.74 in July which gives it a queue standing in the 52nd percentile; Germany, at a very similar level of 50.66, has a queue standing in its 38th percentile. Why? Over this period The German economy has been stronger than the Japanese economy so for Japan this reading is a relatively stronger value for it and represents more strength.

In raw PMI terms, there are eight countries with readings above 50 in July in the sample of 17 (yes I'm counting the EMU value in addition to counting its to members that are in the table). There were 10 of these countries above 50 in June and there were 10 also in May. In April, 4 months ago, there were nine readings above 50. Six months ago there were 11 readings above 50 and 12 months ago there were nine readings above 50. That's total refers to the number of countries that are seeing manufacturing expand month-to month. It has been relatively stable over the past year, however, only the UK, Canada, India and Indonesia have had readings above 50 in each one of these periods. The US comes close with a reading above 50 in every period except in May when its manufacturing PMI stood just below 50 at a level of 49.

There is considerable shifting going on the manufacturing sectors, as the queue and the percentile data show us. Countries are experiencing widely different conditions even though these are manufacturing sectors therefore largely producing tradable goods and selling into the same global markets but obviously different emphasis on their local market compared to the global market. As explained above, the percentile data essentially place the months reading in a queue of historic values and tell you how often the reading has been weaker than its current level. The percentile readings position the current index between its highest and lowest values during the interval. Not only are these metrics widely different across countries but we just showed they have been fluctuating over the last year.

Evaluating all the countries since April 2011, Germany's manufacturing sector has fallen the most from its peak; it is lagging 11.3 points below its best value of the interval Taiwan is the next most affected; it is below its peak by 9.6 points followed by France and India both of which are 7.8 points from their peak readings. The UK has risen the most from its cycle low, rising by 9.2 points and currently residing at its cycle high. While Germany has fallen the most from its peak it's also risen the second most from its cycle low of 7.7 points, followed by France at +7.8 and the US at 6.4 points and the whole of the Eurozone at 6.3 points.

Looking at the net performance of the last three months, there is a rather striking consistency: we find that Canada, the UK, the US, France, Germany, and the whole of the euro area, are stronger while all the other countries the table have slipped on balance over the last three months. Over six months there is a slight change in these calculations as Japan has risen over six months and so has Indonesia. Over 12 months Canada slips into the declining category while Japan, Taiwan, Vietnam and Turkey show net increases on the books over 12 months despite declines over three months (and, for all save Japan) as well as declines over six months.

Obviously there are different degrees of momentum being experienced in these countries. For the moment it looks like the developed Western economies are doing the best and having the best momentum. These are countries where the currencies tend to have served the most as reserve currencies and where central banks have used extraordinary monetary measures to boost their economies. Japan is a relatively new-user of the quantitative easing strategy, while the US, and the Bank of England have been using it for some time. The ECB has been using other strategies to try to provide financial help to its beleaguered region without violating the principles of the treaty that governs his actions.

The BRIC countries and the other developing economies on this list depend a lot on world trade. World trade volumes have been weak and have only just begun to show some lift. The developing economies had been the fastest growing; they are now falling on the hardest times. And this is not simply coincidence. Prior to the financial crisi,s many of these countries have relied upon a model of export led growth. But domestic demand, having slowed sharply in the developed world meant their market demand for exports slowed down. And with the advent of the financial crisis itself, debt levels in the US in key European countries rose sharply as did the burden of financial debt for a number of consumers.

Together these factors have caused consumers to curtail their purchases and have made the developed economy markets less attractive for exporters. This effect has hit China the hardest, because its economy is so large and it depends so much on export flows to the US and to the European Monetary Union both of which have slowed sharply. China is now involved in a sort of running adjustment trying to keep its exports as strong as it can while it furiously tries to develop domestic demand. For China some switch to capital projects can help to do the trick, but eventually China is going to have to undermine its own export model by paying his workers more so that they can become good consumers creating a domestic market for the goods China is producing. The same effect is going to be working through the economies of the other countries. But because they are smaller they may have more wiggle room in terms of making adjustments.

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