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Economy in Brief

Manufacturing PMIs Continue Extended Softening Streak
by Robert Brusca  May 5, 2022

The S&P Global manufacturing PMIs continue to show slippage for worldwide manufacturing. The chart highlights three main areas: China, the United States, and the euro area. Each of these areas shows consistent slippage from early-2021 onward and for China a bit longer.

The two tables below show manufacturing PMI readings and summary data for 18 countries in April. Half of them show worsening in April and half of them show improvement. This is an improvement from March when 12 showed month-to-month weakening; it compares to February when seven showed month-to-month weakening. Those statistics mark this as a period of unevenness tending to weakness.

Over three months compared to six months, 12 members in Table 1 show weaker results. Over six months compared to 12 months, 11 members in this table show weaker results. However over 12 months compared to 12 months ago, only 5 show weaker conditions. These five are China, Brazil, Malaysia, Vietnam, and Turkey, a selection of developing economies.

There are 7 reporters and the table with manufacturing percentile standings (cast form data back to January 2018) that are below their medians; these are identified by any queue standings that reside below their 50% mark. Countries in this situation include Germany, China, Russia, Brazil, Taiwan, Vietnam, and Turkey. Countries with queue percentile standings high in their respective ranges are led by Malaysia with a 90.4 percentile standing, followed by the U.S. with an 86.5 percentile standing and Japan with 82.7 percentile standing.

Table 1 also evaluates manufacturing sectors for their strength since COVID hit. The final column of the table shows the change in manufacturing PMIs from January 2020. On this timeline, Germany and the euro area had the two strongest gains, followed by the U.S., the U.K., and Canada that also have relatively strong gains. However, there are still four countries in the table that show net declines on this timeline. China leads them, with a decline of 5 points, Turkey with a decline of 2.1 points and declines by manufacturing in India and Taiwan.

The 18 countries in the table show the queue percentile standings average 58.9 percentile which is a reasonably firm but not a particularly strong reading. If we position them on this timeline between their respective high and low values, they stand relatively higher in their range than in their queues with a 74.3 percentile standing on average.

Table 1

Table 2 gives us a little better sense of the distribution of the standings of the various PMI values. Here we group into cohorts the PMI diffusion values according to the raw score readings. The far-right hand column provides figures for the last four-year average which shows 44% of the values on having been in the 50 to 55% range, with 15% in the 55 to 60 range, 3.9% in the above 60 range, 33.4% in the 40 to 50 range, 2.7% in the 30 to 40 range, and 0.3% below the 30-percentile mark.

We can compare the monthly or the three month or the one-year averages to this four-year benchmark.

In comparison, April is a relatively strong month with 50% of the 18 reporting countries and areas in the 50 to 55% cohort, 27.8% stand in the 55 to 60% range and 22.2% in the 40 to 50% range. This represents a relatively tight clustering around the middle of the distribution with a slight bias toward more than just moderate growth (moderate growth being the 50-55 cohort). For March, the 50 to 55% category contains 44% of the countries with equal proportions flanking it for the 5-diffusion point range above and below. February produces a result a little bit more like April with slightly more strength.

Looking at the sequential data from 12-months to 6-months to 3-months, we can see that the 50 to 55 percentile cohort becomes slightly more populated over the shorter periods; however, the five-point range above the middle cohort and the 5% range below the middle cohort fail to show any clear trend tendencies.

Table 2

What we deduce from this, is that there has been some moving around of PMI values; Table 1 shows a bit more of a sense of trend and weakness. However, in Table 2, we see that the trend has largely kept countries in their same broad cohorts even though there has been a clear trend to weakening in the precise diffusion readings themselves.

We need to be wary on the outlook because there are clear negative forces operating in the global economy: the war between Ukraine and Russia is the main threat to growth and prosperity. That situation could change with terrible consequences. In the meantime, war is exacerbating supply chain issues they were already a separate problem stemming from the pandemic period with firms still trying to repair lingering supply chain problems. However, with the war these are clearly going to get worse and new problems are being introduced. The war is also feeding into inflation pressures that had been rising of their own accord prior to its outbreak. As a result of that, central banks are generally embarked on programs of raising interest rates to contain and rollback inflation pressures. In addition, strains of COVID continue to circulate but countries are taking different measures to address this public health issue.

That list, of course, leaves us with many more negative risks on the horizon and that is worrisome. For the time being, central banks assume that economies are strong enough for them to be able to raise interest rates to rollback inflation pressures. However, in this environment nothing is a given anymore. Significant risks exist that could have impact on a broad set of economic variables from GDP to inflation, to employment, to exchange rates, and to an additional extremely broad array of economic variables. There is no 'safe forecast' to make in this situation.

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