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Economy in Brief

Manufacturing PMIs weaken in May; April's Trade Glowers Trample May's Flowers
by Robert Brusca  June 3, 2019

Asian PMIs continue to weaken in May. The average Asia PMI reading weakened and the split between those getting weaker and those getting stronger month-to-month was divided at 50% again in May, just as it was in April. Weakness is pervasive not just for a few of the Asian economies. Of the 14 countries and one area in the table, 11 of them showed weakening in May (for these calculations I use the euro area and ignore France and Germany who are members and already represented in the euro area composite). I will henceforth refer to these countries and this area as 'economic units.'

This compares to 10 economic units weakening in April and only five in March.

However, I have also separately calculated the average PMI values (unweighted) for the Asian members in the table; those metrics result in a slight deterioration for the Asian reading to an average of 50.2 in May but the Asia 8-country average reading has fluctuated in April, May, June and over its three-month average, six-month average and 12-month average between a high of 50.8 (12-month average) and a low of 50.1 (in March and for the six-month average period). Asia has been weak and consistently weak over the past year with the average Asian reading skating close to a stagnation reading repeatedly. With an average diffusion reading of 50.2 in May and half the Asian countries improving and half deteriorating, Asia remains on the cusp.

The overall monthly results, judging from the percentage of economic units weakening vs. strengthening, seem to show some deterioration in May and April compared to March. The message from the changes over sequential period averages is different, however. The 12-month average shows weakening in 12 of 15 economic units, compared to the previous 12-month average. The six-month average shows a weakening in 10 of 15 economic units, compared to the 12-month average. Over three months, there is weakening in only 8 of 12 economic units, compared to six-months.

The broad trending patterns and up close trending patterns are in conflict and right now since there is a trade war in progress; there is concern that conditions are going to get weaker before they get stronger.

A widening conflict?
The ongoing trade dispute may have just become thornier as the U.S. has now hit Mexico with a potentially escalating tariff to try to get its attention over the U.S. migrant problem that Mexico's policies seem to be helping to make worse. Mexico, however, has responded positively to the tariff threat not wanting tariffs imposed on goods crossing the border to the U.S.

In broad terms, the U.S. and the EMU area saw a coincident upswing in manufacturing from late-2016 though late-2017. At that time, the U.S. manufacturing sector seemed to hover for the better part of year near is strongest recent values while the EMU manufacturing sector began a steady march to decay. In the October-December 2018 period, decay hit the U.S. manufacturing sector as well. Japan and China followed the timing of the European cycle a bit more closely than they followed the U.S. cycle, but both Japan and China had readings that remained relatively flat during the period compared to the swings in EMU

Risks tilt to China and Asia
Asian economies as a whole are showing some resiliency in recent months in terms of their sequential averages, not in terms of standalone monthly readings. The U.S. and China are the two major tariff wielding countries and China that sends many more goods to the U.S. that will be tariff-affected than the U.S. sends to China. As a result, China stands to be more greatly impacted by this war.

No freeze...
However, the U.S. and China are talking. And the US and Mexico are talking. And while talking is good, the unexpected breakdown of the U.S.-China negotiations and the alleged reason for it does not make it likely that the rift that has been exposed can be easily repaired. The U.S. wants real change not a promise since China has not been good to its word. The U.S. wants clear language, clear numerical objectives and clear recourse if the agreement is not held. China finds some of these things to be a violation of its 'sovereignty!

What a trade deal requires
And guess what! China is right! Because that is what a trade deal is in its essence: it is ceding absolute sovereignty and replacing it with something else, shared sovereignty. A country agrees to trade under rules that cost it some of its sovereignty. Or put another way two nations get together and recast their current systems and rules to establish joint sovereignty in a trade agreement. Rules for trade are put in place so that there is a bilateral arrangement that binds both parties to the agreement when a trade deal is bilateral. The new 'trade laws' coexist with each nations regular laws but take precedence where they are applicable- over matters of trade. Giving your word but retaining full sovereignty is cheating. So China will have to come to terms with that. Either it wants a trade deal and will make the necessary accommodations every nation party to such an agreement makes, or it will not have one. It's as simple as that.

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