Global PMIs- A Rebound and a Fun-House Mirror Trick

In the movie Jurassic Park, there is a scene in which a jeep carrying the movies' 'stars' is fleeing a T-Rex. As the driver looks in the rearview mirror, you see plainly the warning that 'objects are closer than they appear.' Similarly, but inversely, you look at this chart and many of the PMI gauges seem to be right back where they were. But that is deceptive because we know that growth is weaker, unemployment is higher and that the PMIs are part illusion.

The impact of the coronavirus is strikingly clear at least as far as the impact on the PMIs is concerned. Today's data bring the service sector readings into focus that allows a calculation of the overall private sector PMI as well. The composite PMI gauges show widespread improvement in July as only four of the representative 16 values in the table have readings below '50' which is the marker that separates expansion from contraction. And only two show a deceleration from month-to-month. In July, we see deceleration in India and China. We see ongoing contraction in India, Japan, Singapore and Brazil.

The unweighted average reading for the United States, the EMU, the United Kingdom and Japan is over 50 in July at 53.6. That group-average reading hit a low at 23.7 in April and has climbed steadily higher although the rate of ascent is clearly slowing. This four-unit average plunged into a recession signal, dropping by 13 points in March and shedding another 15 points in April. After hitting a trough in April, the group reading improved by 9.5 points in May and by 14.8 points in June. It has improved again by 5.4 points in July. The pace of improvement is slowing and unemployment rates are still high.

At this point, it is time for another reminder on what PMI gauges are and are not. They are indicators of breadth, of how broadly a trend is being observed. The higher a value above 50, the more broadly an expansion is progressing. The lower below 50 the more broadly a contraction is being felt. The figures assess month-to-month changes.

Users of this sort of PMI 'diffusion' data tend to jump to the connection that a broader move is a stronger move. And that is usually correct and it is why PMI data are used to assess underlying economic performance. Also PMI data tend to be sensitive and therefore are good barometers of change. However, never forget that these are about changes and about the breadth of changes so that right now when the various economies are rising out of a deep pit, a diffusion value may signal a very broad rebound. But the level of activity that is returned in terms of conventional metrics like GDP, industrial output or retail sales or jobs may not seem like the sorts of correspondent values you would expect.

To this point, strong gains in PMIs have been associated with fairly large gains in production, jobs and retail sales globally. But in the U.S. today a private sector job survey has just turned up a weak reading that pertains to U.S. job growth and overall employment levels. The actual U.S. job numbers are due for release on Friday, but this preliminary ADP survey shows job gains for the month of only 167,000 instead of one-and-one-half million as expected. Meanwhile, the US ISM manufacturing and nonmanufacturing surveys on the month were strong. However, in defense of the PMI data themselves, while the PMI headlines were strong for the U.S., the job components of the surveys are still weak. And that's a problem since people need jobs to generate incomes, pay their bills and support spending to promote ongoing recovery.

There has been a relapse, or a second wave, or a second spurt of the virus globally. Countries have taken a step-back or more from their re-openings to try to deal with this and to control the spread of infection. Only Sweden is not stepping back and it has actually showed more resilience in its GDP in Q2 than most of its European neighbors (more here).

Of course, this exactly what is wrong with our approach to the virus and maybe Sweden's choice will come to be more broadly respected. I heard one commentator this past week talk of us as being on a 'hamster wheel' (spinning a wheel and going nowhere). But this is exactly what POLICY is designed to do. There is a lot of focus on all the attempts to develop a vaccine, but vaccines have to be vetted then produced, distributed and administered. Once a vaccine is approved – assuming that one is- the final stage will still take some time. We are looking at a long period on the hamster wheel because policy has made no provision to deal with the virus and the whole approach has been to hide from it and to pray for deliverance by a vaccine...except in Sweden.

Every time there is an outbreak and an economy is lockdown, a nation misses another opportunity to let the virus spread and to gain more widespread immunity naturally. The irony here is that all of these lockdowns do what they are intended to do; they stop the spread of the virus. And by doing that they preserve a large proportion of the population as uninfected and as vulnerable for the next go-round of infection. This policy creates a never-ending cycle of open up and shut down. I prefer to refer to it as the virus hokey-pokey. Since you open the economy up, then shut the economy down, then open the economy up and spread the virus all around… We now apparently have all our eggs in the vaccine bandwagon of the private sector scientists. And let's remember since the alternative to getting a vaccine is the 'Hamster Wheel,' there will be tremendous pressure on those who evaluate the results of the virus tests to say if they are effective and to approve their use.

So as we look at the global economies we see we are caught in a repeating cycle and we may be approaching a flat stage or maybe another down stage because the virus has spread again and policymakers have largely decided to lean against a broader infection. That policy choice is also costing a great deal of money in economic stimulus and distortion in central banking stimulus and still many businesses are going bankrupt and many have lost their seed capital and will not be coming back when the pandemic ends. In the U.S., this 'pandemic' has made 40% of its kills in nursing homes. So I hope that policymakers know what they are doing. But in this case logic tells me they don't. They have chosen the most destructive, the most disruptive, and the most damaging course of action and are gambling the future on the speculative development of a vaccine when any scientist will tell you that there is never any assurance that a vaccine for a disease can or will be developed. And the great irony is that this virus kills old and sick people and those are the exact people who tend to not respond well to vaccines. So what are we doing?

I would not be betting on conditions getting better fast or at any time soon. We are up against the eight-ball of disease and we have so far not made good choices on how to deal with it. The service sector PMIs are either weak or do show strong temporary readings as they make strong monthly comebacks that are less than full recoveries as the service sector remains under pressure from the return of the virus. In many places, a lot of service sector businesses have not reopened or have reopened but only under restricted conditions. I caution about how you interpret the PMIs in this environment.

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