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Economy in Brief

Manufacturing PMIs Declining; Asia Weakening
by Robert Brusca  April 4, 2022

In March, of the 18 manufacturing PMI entries in the table, 12 worsened. Only one-third of the countries improved month-to-month. This is the same split as over three months when 12 also declined compared to six months ago. Asia weakened broadly with Japan and Indonesia as exceptions.

Some PMIs indicate sector contraction
Five countries report manufacturing PMI values below 50, indicating that manufacturing is contracting in those places. These entries include Mexico, China, Russia, Malaysia, and Turkey. China is experiencing a wave of Covid reinfections and remain dedicated to its zero-Covid policy.

China and Russia
Flares of infection in China led to swift and broad targeted shutdowns that greatly impact the economy there. With the Russia-Ukraine war having started in late-February and economic sanctions imposed on Russia because of its aggression, the Russian manufacturing PMI slipped to 48.6 in February from 51.8 in January. It has in March fallen again to 44.1, indicating sector contraction as sanctions begin to bite- and this is only the beginning of that process.

Malaysia, Turkey, and Mexico
Malaysia has experienced a spike in Covid infections in March as they peaked early in the month – part of the reason for its weakness. Turkey saw its PMI weaken on the month and fall to indicate contraction; it is less a case of virus issues as its outbreak peaked in early-February. Inflation in Turkey, however, has surged to over 61%. Mexico is an odd case with its Covid infections peaking early in the year and dropping since. Mexican inflation, however, has been on the rise. Its PMI is below 50 indicates contraction and it ranks below its historic median as well; nonetheless, it stands in the top 20% of its historic range of values. We can conclude that Mexico's weakness may not be as severe as its standing implies because of a very tight distribution of values. With such extraordinary weakness China and Russia have the larges gap between their range and standing positions, but among other entries Mexico and Vietnam are the next largest gaps. The median gap is 13 percentage points; for Mexico, the gap is 34 percentage points.

Over six months, ten of the 18 manufacturing PMI entries show weakening. But over 12 months, only China and Brazil are worse on balance. The average PMI levels for the entire group of emerging economies in the current month, as well as for three-months and for six-months, are all just a few ticks above 50, the dividing line in the PMI lexicon between expansion of the sector and contraction. Manufacturing has been on the razor's edge of expansion for the past year.

Among entries only Canada logs a manufacturing reading at its high on this nearly five-year period. The average reading for all entries is at about the 75% market between its sample period high reading and low reading. The far right-hand column provides queue percentile standings. They show only Canada with a 90-percentile standing or higher. But five countries stand below their historic medians (below a rank standing of 50%) among them Mexico, Vietnam, and Turkey. However, the weakest ranking countries are China and Russia; China's ranking is in its 1.7 percentile and Russia's is in its 3.4 percentile.

The average gain in PMI levels for January 2020- since Covid struck is a gain of 2.7 points, a meagre rise for period of over two years. However, China, Russia, India, and Turkey are net lower in that timeline. Germany has the largest gain posting rise of 11.5 points, followed by Canada at 8.3 points, the U.S. at 7 points, Japan at 5.3 points, and the U.K. at 5.2 points.

Table 1

The distribution of values
Table 2 looks at the distribution of manufacturing PMI values in selected PMI cohorts. In March, the proportion in the core of the moderate-to-normal range of 50-55 is 44.4% of the reporters. This compares favorably with 3-month, 6-month, and 12-month average as well as the four-year average. One step up in the 55-60 range, a much stronger cohort, 27% of observations reside. This reading is lower than in the previous two months and it is lower than it has averaged over 3-month, 6-month, or 12-month but it is far above its 4-year average. In the weak 40 to 50 cohort, 27.8% of the observations appear and this is large by the standards of the 3-month, 6-month, and 12-month periods but it is lower than the four-year average. In March, there are no entries in the more extreme cohort groups. These are distribution compiled based on diffusion readings not on PMI percentile standings.

Table 2

Summing up
On balance, we see creeping weakness in play. The virus is still doing its mischief, the draconian anti-viral policies in China take their toll and there is the war in Ukraine and sanctions on Russia that also create problems for economic growth. In addition, central banks are becoming less accommodative. In the U.S. and the U.K., central banks are hiking rates and making plans to hike more. ECB is making its own plans. While optimism about growth abounds, there should be a sense of risk as well. Because of bulked up central bank balance sheets, we cannot be sure that the usual market signaling devices like yield curves still work to signal economic health. In the U.S., the yield curve already is flashing some waning signs and there is a cottage industry of people playing Wizard of Oz and warning you not to look or worry about what is behind ‘that' curtain. These are the yield curve deniers. We are in the middle of seeing the consequences of the Fed's denial of inflation and what that has done to the policy environment. Setting aside long-established reliable signal is something that you do at your own peril.

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