PMIs Show Global Gains Even As Japan's Manufacturing Lags

The global recovery is gaining momentum just about everywhere – at least among these G-7 members, as the table below demonstrates. The lone exception is Japan where manufacturing actually worsened on the month. Everywhere else manufacturing improved. Everywhere services improved.

The global recovery process
There is pretty much the same recovery going on everywhere. And this traces back to the fact that this was an induced recession rather than an organic one. Global governmental authorities made the decision to fight the pandemic by shuttering their economies and then once it seemed safe they began to open them up again. Because of this the services sector is leading the recovery which would otherwise be rather unusual. Services lead the recovery with a bigger gain from May to June in all countries in the table except the U.S. Although services are the leading stimulus sector in June in terms of the monthly PMI change, the level of the PMI index as between services and manufacturing is a split ticket. EMU, Germany and Japan have higher raw services readings while France, the U.K. and the U.S. have relatively stronger readings on manufacturing PMI gauges. However, when we adjust the diffusion readings to re-express them as percentile standings, we find that manufacturing is the relatively stronger sector on a percentile standing basis everywhere except in Japan. There the two sector rankings are both very low and close in value.

These comparisons paint a relatively consistent picture of how the recovery is progressing. The shutdown/lockdown hit services relatively harder since sheltering at home left people unable to consume many services. Of course, many services are not accessible over the internet. The best internet joke that explains this is the man whose maid called him during the lockdown to provide internet service. She explained to him how he could clean his own apartment- priceless.

Once the lockdown ended or began to fray around the edges people were able to go out, move about, and consume both goods and services with greater ease. But some goods purchases had never been shut down such as food and drug store products. Internet sales were still accessible. In the U.S., some large department stores that also sold food were allowed to remain open and few others. So what we are witnessing now is a rebound in both goods and services that is favoring services- at least for now.

Future challenges
This tilt will not last because services have some of the biggest issues to surmount to return to normalcy. Many services businesses are 'people intensive' and many in the past have been businesses conducted in closer quarters that many people would feel comfortable with these days. After some initial rebounding and filling in of services industries their progress toward normalcy is going to become impaired and that should happen much sooner than for the goods sector businesses where the issues of contract and proximity are more easily handled.

For now we see the steep fall and rebound in services and a substantial fall and rebound in manufacturing and still there are weak readings all around. Among the reporters in the table, only France is experiencing private sector expansion overall and expansion in both manufacturing and in services. The U.K. has manufacturing barely in the expansion zone and the U.S. is close to posting manufacturing expansion. Still, with the exception of French services and its impact on the French composite reading, all other metrics have percentile rank standings below their 30th percentile and many are much weaker than that.

With many gauges getting back to more normalized levels and away from the draconian depths of the past several months, there will be a question about momentum in the months to come. As of June, all the PMI readings and sector readings are in their respective 44th diffusion level or higher with the exception of Japan. All indexes are within six-diffusion points of showing expansion instead of contraction. But all economies are going to reach their own personal invisible line where progress will get push back from the behavior that people are not willing tolerate as services industries push the envelope closer to normal and as density readings at shops and in streets, and in mass transit begin to rise.

Already some areas are beginning to worry because some virus readings have begun to elevate. The U.S. has some examples of this. Germany has examples of this. There is the joint question of how recovery will unfold as social distancing conditions run up against the old ways of doing business in some service sector industries and the question of whether there will be a second wave of infection that will create a totally different kind of setback. These are the things we will be watching for.