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Economy in Brief

EMU PMI- Thin Gruel for Progress; Will the Coronavirus Trump the Outlook for 2020?
by Robert Brusca  January 24, 2020

The flash composites show some improvement this month- but not much of it. The EMU is dead flat unchanged month-to-month. The German index is higher while the French composite is weaker. However, the U.K. composite swings to expansion in January as does the composite for Japan. The U.S. is also slightly improved- running on ne cylinder.

Still, there are rankings after the flash releases for 15 sector and composite readings excluding the U.S.; of these only Japan's services sector has a standing above its median on this timeline (a reading above a ranking of 50%). Adding in the U.S. does not change that.

All the non-U.S. manufacturing gauges improved month-to-month. Their average standing is in their 20th percentile between the lowest quartile and the lowest one-fifth of their distribution of results since January 2016. However, year-over-year all manufacturing sector readings are lower. Year-on-year all non-U.S. service sector readings are higher (the U.S. is lower) and by an average of 2 diffusion points. The chart, tracking the sectors of the EMU, makes it clear that there is no sector going anywhere fast.

While everyone has been holding their breath for the impact of the U.S.-China trade deal, the PMIs have been holding their 'breadth.' And now there is a new factor to gasp about: the coronavirus. Oil prices have fallen below $62 a barrel on Friday. They are heading for a weekly decline. The coronavirus in China has spread and may spread further. Already it is curbing travel and oil demand, overshadowing supply cuts in the oil producers. The virus has prompted the suspension of public transport in 10 Chinese cities and caused 26 deaths to date. No one had a 'coronavirus' penciled into their forecasts for 2020, but there it is. It is a new negative factor and the concern about it has only just begun- it's not a Carpenter's song.

Trends for the PMIs are definitely upward, but that is more an arithmetic point than an economic observation. As statistics go, there is little statistical difference among the readings of the past year for manufacturing or for the services sectors- both display weak readings and both show lethargy in their momentum. Suffice it to say that neither index appears to be in a position to absorb a negative shock or to 'make up for' weakness in the other index. This is a description of vulnerability. It was the main reason for my down-beat view of 2020 where so many things were on the verge of 'going wrong' and where, in my estimation, far too much hope was being placed in what was and is a rather weak U.S.-China trade deal with so much left to do. Those vulnerabilities remain.

There is also the new stirring of the hornet's nest in Iran and the blowback that has created in Iraq. Netanyahu is on the bandwagon about the threat posed by Iran. Turkey is spreading its influence and pursuing its own divisive policy objectives in the region past its borders. The U.S. impeachment effort continues as Democrats try to destroy the image of Trump since they cannot succeed in removing him. The impact this will have on U.S. policy this year and next year regardless of who wins the election will do lasting damage to the U.S. political scene. And now the coronavirus slaps a layer of who-knows-what on top of all that.

Meanwhile, globally inflation is still under shooting and if oil prices continue to swoon; that dynamic could worsen. Lagarde has launched a review of ECB policies. With this review and its conclusions, we will find out the kinds of policy and alliances she seeks on the ECB.

PMI results are only a reading of the pulse of the economy at a point in time. These gauges tend to be sensitive to change in activity and they are readily, topically available. They continue to depict a very weak patient. That view is not changed by this month's release. And with the new wild card of the coronavirus in play, all bets are off as what the PMI reports will look like next month. Welcome to abject uncertainty 2020, the year when uncertainty was supposed to diminish because Brexit would firm up and the U.S. and China were beginning to 'make nice.' Remember that the U.S. still has other trade negotiations to get started, importantly with the EU. North Korea is a loose end. Hong Kong still is a loose cannon. China-Taiwan tensions are elevated in the wake of the Taiwan elections and Australia is on fire. Is this the 2020 you expected? Is it time for a change in outlook or strategy?

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