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Economy in Brief

Markit PMIs Show Broad Decay in September
by Robert Brusca  September 23, 2021

The flash PMIs from Markit for September are no back-to-school treasure. The readings are lower across the board. By that, I do mean clear across the board. They are lower for all countries on all sectors including the composites. September saw a very broad and relatively steep backtracking in activity following another broadly weak month of August. While some of the PMI declines are relatively sharp, the percentile standings for the September flash PMI values are still relatively firm but much less strong than they were several months ago.

However, as we assess the sequential progress from 12 months to six-months to three-months, only manufacturing shows weakness everywhere but in the United States. In addition, the trends show slowing in services as well and therefore also in the composite. Over six-months compared to 12-months and over 12-months compared to 12-months ago, all sectors in all countries are strengthening. That is from a base in September 2020 and for the previous 12-months over a period from August 2020 to September 2019, encompassing the Covid disruptions since the sequential data are based on average values.

Encroaching weakness is the clear call for now: for the EMU, for Germany, for France, for the U.K. and for the U.S. There is a growing sense of weakness according to the monthly PMI data that the sequential data do not quite embrace. This is because the sequential data are based on hard data trends and do not include the flash estimates for the current month. That inclusion would weaken the sequential trends more clearly.

Even so on that basis, the U.K. shows up as weaker overall over three months of hard data with manufacturing weakening across Europe. Looking at month-to-month changes, the average composite (flash) for these six jurisdictions fell by 2 points in September, made up of a 2.7-point drop in manufacturing and a 1.8-point drop in services. The true three-month drop in the PMIs from the finalized June values to the flash September values shows an average manufacturing drop of 4.8 points and an average service sector drop of 4.8 points). April, May, and June were relatively strong readings globally. Since then, there has been a steady weakening and the drop off in the PMI gauges is sharp. The U.S. service-sector flash registers a loss of 10.2 diffusion points over the last three months (point-to-point). The U.K. services sector sheds a large 7.8 points in losses. In France, Germany and all of the EMU, the service sector losses are much smaller. Net three-month manufacturing losses are largest in the U.K. at -7.6, compared to -6.6 in Germany, -3.8 in France and -4.7 in the EMU. In that three-month period, the U.S. manufacturing held its own somewhat better with a step back of only -1.6 diffusion points.

Recently, we have begun to see some differential impact across sectors. It is not so much in whether the sector is being hit adversely, as it is in terms of how hard it is being hit. During this recent roughly six-month period, PMI levels have been reduced from averaging over 60 to averaging in the mid-50s with some of the local and sector specific losses quite a bit worse than that, as we have seen.

As always, PMI data raise questions. These are statistics garnered quickly through surveys that tell us if firms are adding more or fewer workers and churning out more, or less, output and so on. To get the data out quickly, diffusion indexes cut to the big picture chase of 'up or down?' And they avoid the question of how much and all the accounting that requires. But that accounting is important. Even here among the PMI data, it is clear that a survey of up or down misses some of what is important and that is the question of 'how much?'

All the important questions are going to be about 'how much' from here on out. In the U.S., the Fed is worried about inflation coming down. How long will it stay up and how high will that be? The Fed is also conditioning policy on the unemployment rate: how far will it fall and by when? Magnitudes are becoming the name of the game. Right now, having PMI data point lower to weaker gains is not what central bankers want to see- regardless of the magnitudes.

Also in this period, when a lot of businesses have folded, I think the very meaning of PMI data is compromised. If a firm folds, its employment geos to zero its output goes to zero. It has a big impact on accounting data. But if a firm is not contributing data to a PMI survey, it is just excluded. It does not make that survey weaker. However, in real life the economy has gotten weaker.

So be careful in how you use the PMI data. For this month I think the signal is not confused and conditions appear to be weakening again. Since so much of the weakness is in the services sector, it looks again like it is a Coronavirus story. However, it is still true that the proportion of those vaccinated has risen and there are fewer hospitalization and fewer deaths from the Delta variant. Still, we have 'discovered' (actually something epidemiologist should have known all long) that 'being vaccinated' does not mean you are less prone to spread the disease. Historically, vaccines have not acted to reduce contagion just personal infection. So, the notion that because vaccination rates had risen mask-wearing was not warranted was, well, not based on science. It was a bone thrown to the vaccinated to try to get more people to get vaccinated for the reward of removing their mask. And that is how public health pronouncements have been made to try to coerce or cajole behavior instead of to promote and build on what science has learned. And that is sad indeed. Because the Delta virus can break through and infect those already vaccinated and because vaccinated people can spread the disease, we are in a more dangerous world than we previous thought (although the world has not changed only our information has improved). And since there is still a lot of virus fear and wariness and, in addition, also vaccine wariness, all of this is affecting adversely economic growth. And there is no telling how long that will go on.

Commentaries are the opinions of the author and do not reflect the views of Haver Analytics.

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