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Economy in Brief

Composite PMIs Show True and Sudden Weakness
by Robert Brusca  April 3, 2020

While the deterioration experienced in most PMIs whether sector or composite generally is severe in March, despite the abruptness of the March collapse the table memorializes a long period of slowing that has preceded the current sudden collapse. The virus came out of the blue around the turn of the year, but weakness from various sources has been with us for a while.

While some analysts want to focus on some vague notion that economies were in some sort of strengthening ahead of the punch from the virus, that interpretation appears to be premature or applicable only to a handful of indicators.

From the data table below, it is clear that there was some sort of snapback in January when only two of 19 composite indicators were below 50 and only 5 of 19 slowed from the month earlier. However, that appears to be much more an anomaly than a reality.

In March, 18 of 19 indicators are below 50 and 17 of 19 are deteriorating; in February, 7 were below 50 and 9 deteriorated month-to-month after that January hiatus from abject weakness.

January is an aberrant reading compared to the earlier three-month, six-month and 12-month trends. The number of countries with a composite below 50 in fact grows from 12 on the 12-month average to 15 on a six-month average to 16 on a three-month average. The number showing slowing paradoxically has eased a bit on this timeline, but only very slightly with the number slowing period to period only varying between 17 and 19 (out of 19!). Slowing is widespread and weakness is growing.

However, the proof of the weakness is in the value of the PMIs that fell so much faster in March than in any other period. From 12-months to six-months to three-months, the PMI median goes from 49.9 to 48.5 to 46.6, a clear weakening trend. In January the median PMI stood at 51.4 that fell to 50.9 in February which gave way to 37.4 -- an abjectly weak March reading.

There is no denying that the period we have feared has come to roost. The virus is hitting everywhere and it is hitting hard. Countries are taking various steps and most are pulling out the stops to try to compensate for virus-induced weakness in national policies aimed at stopping the spread of the pandemic.

The ISM this month is a useful gauge for seeing at a glance what is happening and which countries are being hit hardest. It's a grim story to be sure. There is no good news, just degrees of bad news. The medical profession's tactic of sheltering in place may make the best medical sense, but it is one of the most destructive economic polices possible and is not suitable for any substantial period of use.

I continue to think that sheltering the at-risk population while running mitigation strategies for the rest is the best compromise to keep economies in gear, to flatten the curve, and to protect the at-risk population. But no one is doing this or even advising it. What am I missing?

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