Global PMIs Show Ongoing Struggle with Growth

While manufacturing climbs higher, the services sector remains stuck and nearly unresponsive to stimulus efforts. However, the global services sector did pick up in February rising to 52.8 from 51.6 in January. Emerging markets barely did better with services ticking up to 51.7 from 51.6. Developed economies did much better with their services sectors advancing to 53.2 from 51.6. For manufacturing, emerging markets weakened as developed markets improved. The rank or queue standings show that manufacturing is faring better for each group than for services.

We know that the virus is harder on businesses that require personal interactions. It is not surprising that it has hit harder on services compared to manufacturing. And developing economies are also lagging developed economies in each sector. This may be because of the superiority of health care in developed countries, but soon it will be because vaccinations are more widely spread more quickly in developed countries.

There are 23 jurisdictions in the table below. Summary data are for the countries and the EMU excluding any separate count of its four largest economies since that would be double counting them. So the summary data refer a total count of 19 jurisdictions. Among those 19 the monthly count of readings below 50 has stabilized between 6 and 8 over the last three months; the number that are indicating a slowing has declined from 9 in December to 8 in January to 6 in February. Progress is being made The sequential transition from 12 months to six months to three months finds that there is a clear improvement of the six- and three-month averages compared to the 12-month averages but no improvement from six-month to three-month. Moreover, the percentile standings show 11 readings below their respective medians (below a standing of 50%) compared to eight above their medians of which three are in the top 10 percentile of their queue of data since December 2016.

The data set show that there is a huge difference in how countries are faring with the virus when we compared their current economy to what it has been over the last four years.

The chart makes it very clear that manufacturing is doing quite well – it has rarely been better- but the services sector has been stuck.

This brings us to the safety net programs governments have adopted and their role in cushioning the impact on people while beating the virus and laying the foundation for recovery to advance further. The U.K. has just extended its furlough program. In the U.S., there is a hulking $1.9 trillion stimulus bill. Support programs to sustain living conditions while the virus issue drags on make sense. The U.K. has fielded criticism that it did not extend its furlough program sooner. But in the U.S., the proposed package is so massive and the U.S. manufacturing sector is already so strong (in its 98th percentile with services in the 95.9 percentile); it is not clear what there is to boost.

The U.S. package has much more than what is necessary to support people while the attack on the virus progresses. And with the virus still circulating, it’s clear that the services sector is not going to be coerced into more hiring or growth until the virus is contained. The U.S. manufacturing sector is already firing on all cylinders. It is not clear what a package of this size is meant to do since even if there was more spending on goods, much of it would be provided from abroad and would not stimulate the U.S. economy. Services will not expand more robustly until it is safe. People have pulled back from certain activities and some state level governments are reinforcing that by capping what certain service sector businesses can do. Stimulus will not bridge or even budge such gaps. There is only so much stimulus that can be run through the manufacturing sector before it becomes counterproductive. The price metrics in the U.S. PMI surveys already are quite high and attest to that.

The U.S. stock market is eager for the impact of stimulus. The bond market is somewhere between wary and fearful. Since low interest rates have been the hallmark of the stock market rally, a retreating bond market at some point will become a problem for stocks. Early 1987 is brought to mind here. Globally, markets are taking their cues from what is happening in the U.S. We are all embarking on a very strange journey with more risk than most economists and politicians seem to want to acknowledge. Unfortunately, it has come at a time just ahead of when such spending might be helpful. The vaccines are being deployed and countries are on the brink over the next several months… a broad brink) of bringing their economies to life by restoring natural conditions and brining people back to work. But if the U.S. adopts too much stimulus too soon, instead of helping, it will overflow and create all sorts of distortions. That is where U.S. policy is headed. We may see it happen this week.