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Economy in Brief

JP Morgan Sector PMIs Mostly Ease in July; Overall Reading Edges Lower to 55.7 from 56.6
by Robert Brusca  August 4, 2021

The Global PMIs have been coming off a peak in this cycle reached in May. There has been an ongoing strong response from the spike lows reached in April 2020. But now as the recovery matures, as global supply chain issues, computer chip shortages and labor supply problems begin to nag global economies; there is a slowing from the peak. There is also the spreading of the Coronavirus- again- as Variant D has spread aggressively. China is experiencing its largest outbreak since Wuhan.

Today WHO has issued a statement urging that Covid booster shots not be administered. WHO is concerned that developed nations that already have used much more of the vaccine than developing nations are going to top up immunity before many countries get a chance to inoculate much of their populations for the first time. WHO wants at least 10% of the populations of all countries to have been vaccinated before any booster shots are administered.

In the U.S., there is some backtracking on virus protocols as mask-wearing is being advised again even for those who have been vaccinated. With this 'retrograde motion' in place for vaccine policy, it is easy to look for weaker economic growth ahead. The U.S. has already reported out weak July vehicle sales largely because of the ongoing global chip shortage. Today a peek into the hand of the U.S. labor market showed a weak private sector survey by the firm ADP. In fact, the slowing we see in global services this month is mostly in the more highly developed economies as emerging economies show service sector improvement.

The overall global trend on sequential averages shows steady, but slow progress has been in train. However, the two most recent monthly global readings reside below the three-month average implying that this trend to improvement is likely to have a break off next month. In fact, both global manufacturing and global services show improving trends in their respective sequential averages (12-month to six-month to three-month). But both sectors show that the average for the last two months is running below the current three-month average and that may be setting the stage for a cessation on what had been on ongoing improving trend. Is it a signal of more slowing to come as well? Both emerging markets and developing markets show this same tendency, reinforcing the concern.

While there are hints of slowing, the queue percentile standings show that these are extremely high reading when evaluated against all readings since January 2017. The overall as well as the global sector readings all stand in the top ten percentile of their respective queues of values over this period. In addition, all the developed country readings, the overall and the two sector readings have 90th percentile standings.

For emerging economies, it is different. The emerging country overall reading has a 43.6 percentile standing placing it below its median for the period back to January 2017. Manufacturing is lagging badly with a 29.1 percentile standing while the services sector has a much firmer, above median, 74.5 percentile standing. But manufacturing is steadily losing momentum as its PMI gauges have weakened for three months in a row. The services gauge weakened from April to May then again in June, but it has moved strongly higher in July although July is still below levels it saw in April and May; but it is back to its 12-month average.

The ASEAN manufacturing sector fell to sharply weaker territory in July dropping to show contraction at a reading of 44.6, down from 49.0 in June. The July level is a very weak 7.3 percentile standing for the ASEAN countries. And unlike the results of the other groups in this table, the ASEAN sequential averages have been steadily eroding.

On balance, there seems to be a problem with global momentum. The rise of the threat from the virus could not have come at a more difficult time. As science is trying to come to grips with what to do, WHO is urging that boosters not to be administered to allow the vaccine to flow to countries that are vastly under-vaccinated. The renewed concern about the virus is going to take an economic toll. No country is talking about mass lockdowns again. Most of the developed economies have a large base of vaccinations to serve as a buffer. But additional social distancing and mask-wearing requirements coupled with the fear that usually accompanies a new outbreak will probably serve to reduce economic vibrancy at a time that growth was just starting to really establish itself. Remember that the PMI values are only part of the story since they are readings on the breadth of activity. While activity is spreading impressively, unemployment globally remains elevated compared to its pre-Covid levels. There is still a lot of work to do in terms of bringing growth up to past standards. Do not let high PMI values fool you.

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