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Economy in Brief

Global PMI Readings Worsen in September
by Robert Brusca  October 5, 2021

PMI gauges are mostly settling to lower level in September with 11 of 21 readings in the table lower in September than in August. August was no walk-in-the-park as 16 entries reported lower readings than in July. In July, 11 entries have worsened month-to-month.

Turning to the broader sequential trends covering changes over three months, six months and 12 months, there are only seven worsening over three months, five over six months and all entries are stronger over 12 months than they were 12 months ago.

The improved broader trends belie the weakening in the monthly observations. Also, the monthly observations are simply month-to-month comparisons with no magnitudes accounted for. In fact, if we look at the changes in average values, we get the table below.

This table accounts for changes in magnitudes for data that are averaged over three months, six months and 12 months otherwise are simply the changes in monthly observations. Both the broader sequential data and the monthly data show trends toward weakness. The lone exception here is the trend for the median change on monthly data. These worsen from 0.2 in July to -1.4 in August then improve to -0.2 in September. But on that same monthly scale, the average data show ongoing deterioration and a sharply escalating deterioration.

The underlying sector data do show manufacturing worsening over three months and worsening over six months compared to 12 months. Service sector data are more equivocal but mostly improving over six months compared to over 12 months then mixed over three months.

The virus obviously has been the main factor impacting trends although now some fundamental economic forces are showing. As the low-hanging fruit of the recovery gets picked, more formidable barriers to recovery are encountered. These include some very nettlesome problems that global economies are going to have to continue to face. They include the global supply chain issues which also encompass various transportation bottlenecks, at ports, from distribution centers and the apparent inability-suddenly- to find enough truck drivers to do deliveries. The recent PMI surveys find firms reporting that input shortages are holding back output. In the U.K., there is a petrol shortage that is feeding in to become an everything shortage. For the moment, Boris Johnson seems in denial and that may be an attempt to prevent hoarding which will occur if a real shortage is feared. In fact, the U.K. is probably already experiencing a hoarding mentality that is worsening its predicament.

A number of years ago, Ikea began to get out of the obsessive lower costs at any prices global supply chain game. What I mean by that is that Ikea executive began to look at how many, in some cases, very basic parts were being shipped fabricated, shipped and refabricated and finally sent to final destinations. There was a lot of shipping and material handling involved. As oil prices rose, Ikea began to see that all this shipping about to get a lower local cost of fabrication did not gain them very much. And so, they stopped it.

This endless pursuit for a lower production cost is the sort of madcap game of musical chairs that was played globally and worked as long as the music was playing. But once the music stopped, shipments were stuck in transit and the more exchanges and fabrication stops a product needed the more time it was going to take to get it delivered. That is where we are today, and it is why supply chains are being recalibrated. Sometimes less is more and that now seems to apply to handing merchandise in the supply chain.

Ford announced yesterday that it expected the U.S. vehicle market to experience a battery shortage until 2025, because the lead times are so long to build the infrastructure to create those batteries.

Still, euro area ministers see inflation acceleration slowing next year. Ministers also somewhat oddly 'concluded' that the energy price spike was not an argument against the transition to renewable sources of energy that occurs under the EU plan of reducing CO2 emissions to zero by 2050. I wonder how bad things will have to get for them to reconsider that interpretation?

In the U.S., Chicago Federal Reserve Bank President Charles Evans continues to see the price pressure as temporary. However, the more that we read about supply chain disruptions lingering, the less likely it is that 'temporary' will be a short time or alternatively the less likely that the residual price pressure will become 'small.'

Policymakers globally are playing a joint game of denial and 'let's pretend.' We are in uncharted waters, and we do not know what will happen. Not allowing the current distortions to affect long existing plans may not be the best course of action. Maybe the best course of action would be to swerve policy a bit from its previous path. But no one wants to do that. Policy courses have been hardened for various political reasons. Policymakers across countries seem to have their own reasons to keep policy on a predestined course.

For now, the PMI queue rankings average a reading in their 64.6 percentile; the median is at its 70.9 percentile. These are solid if not strong readings. Percentile standings show eight PMIs with a strong of 80% or higher standing; six others have PMI values below the 50% standing mark. The average PMI value has been slipping since peaking in May.

The virus seems to be in a dissipating mode as the current wave of infection is diminishing. But we never really know how much the current wave will fall or how long it will stay low- or when it will rise again. Betting on the future is risky business, more so than usual.

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

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