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Economy in Brief

China's Manufacturing Remains Lethargic – Almost Without a Pulse
by Robert Brusca  March 1, 2022

China's manufacturing PMI in February ticked up to 50.2 in February from 50.1 in January, continuing to hug that breakeven line between expansion and contraction at 50. At a reading of 50, manufacturing is stagnant. The 12-month average for this index is 50.4, the six-month average is 49.9, and the three-month average is 50.2. China has been on the borderline of expansion-contraction in a weak mode for well over a year – easily back to 2018.

Zero growth is not nothing, but it's not much either
Apart from a period in 2017 and early-2018 and another period in late-2020 and early-2021 when the index lifted more considerably, the index has been hugging the 50 level since early-2013. China's manufacturing sector simply been in a flat mode. The three-year average for the manufacturing PMI gauge hovers between 50 and 51 from late-2013 to date. Since February 2020, that average has not been higher than 50.3 – barely above pure stagnation. Essentially China's manufacturing sector has been stagnant for a long stretch now that precedes the arrival of Covid.

Manufacturing is slogging through a long funk
The ranking of China's overall manufacturing PMI back to 2005 stands in its 29th percentile that's in the lower third of its range and during period of extended weakness.
• Orders also are weak at their 30th percentile in just about the same relative spot.
• Output is extremely weak, at its 5.8 percentile standing.
• Delivery lags at a 6.8 percentile standing indicate that there hasn't been any pressure on capacity so that firms have been able to deliver goods relatively rapidly because there's been considerable slack in the manufacturing sector and extremely weak output conditions.
• Order backlogs now are only at their 35th percentile.
• Employment, one of the stronger components, has crept up to its 55.5 percentile, putting it above its median reading. But rising employment and weak output mean that productivity in manufacturing has had a terrible performance in this period.
• Input prices are relatively strong at their 70th percentile standing.
• The purchases of inputs are at only about their 32nd percentile standing.
• New export orders stand in their 38th percentile.
• Imports stand in their 35th percentile.
It is a wholistic picture of a weak sector. Only prices are stirring and that is a legacy of the global virus and the shifting sands of global supply chain problems. It also reflects rising global energy costs and war…

PMI standings are poor across the board
These standings show all of manufacturing be in a very weak mode or a place-holding mode. There isn't really anything that's strong outside of input prices and this is in a global environment where inflation forces have ramped up very strongly. In this environment China, of course, is different. It has been running this zero COVID policy, trying to keep the disease COVID from spreading at all and even trying to stamp out its very existence. But totalitarian policies work better against people who can be made complaint than against a virus that spreads at will – its own will not yours… And this approach has put a real damper on activity over the last six months or so since this policy has been in effect.

Momentum is weak
Looking at momentum in China, manufacturing only output, order backlogs, and stocks have momentum easing over three months compared to over six months. However, over six months, there are more categories easing: output, order backlogs, employment, import prices, and stocks all are showing weakness compared to their levels over 12 months. Comparing 12 months to 12 months ago, the signs of slowdown are much broader with only four categories showing momentum on an upswing including delivery speeds, employment, stocks of major inputs, and new export orders.

Whether one chooses to look at China by looking at changes in the manufacturing PMI and its components or at their PMI index levels, the conclusion is still the same: weak.

Has NATO become a four-letter word?
The global economy is in some sort of transition point that is going to be further complicated by the ongoing Russian invasion of Ukraine. The invasion is a substantial military operation that has even prompted Russia to put its nuclear arsenal on alert. The invasion for Russia has not been going well and this will probably cause it to throw even more resources into the battle and for the warfare to become more indiscriminate. Western nations have begun to try to funnel more and more weapons and weapon systems into Ukraine to help them with their resistance. But as the carnage spreads and Russian tactics of warfare against civilians are more widely revealed, will Western nations remain cowed on the sidelines? Is this invasion something that will really horrify people and goad them to action, or will they just see it as an option to watch on TV with popcorn instead of Netflix and allow governments to hide behind the phrase…they are not in NATO?

So far, no other combatants have really entered the fray. Attacks on Ukraine have been mounted from Russian territory, from Russian ally and puppeteer republic Belarus, and from Crimea, the area that Russia previously took from Ukraine. Russia has spread its threat, warning Sweden and Finland of consequences should they join NATO. Think this is only about Ukraine? Think again.

From Utopia to Dystopia?
The situation is serious. Russia has laid an irrevocable baseless claim to a territory it seems determined to take by any means. This is a nation that did not threaten Russia or brandish arms against it. Meanwhile, Russia's economy is being put under a great deal of stress and there's no telling how much this will wind up creating downward pressure for the global economy or how severely sanctions will cripple Russia ability to operate. It's going to create great problems for the Russian economy eventually now that it is being almost completely cut off from the global economy in terms of its central bank, its banking system, and any commercial ties it used to have. China will probably be its safety valve… All of these things complicate creating an outlook for the period ahead along with usual problems we've been dealing with in trying to handicap the impact the coronavirus. Any economic outlook now simply floats in a sea of assumptions that cannot properly be vetted. The future is greatly uncertain. On at least one scenario, it could include nuclear warfare. If you like dystopian movies…stay tuned to reality. CNN could put the Sci-Fi channel out of business soon.

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

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