China's PMIs Improve in June

China's economy has been under pressure. Its approach for attacking COVID known as zero COVID has implemented rolling lockdowns across the country that have interfered with manufacturing and economic activity as COVID itself has proved to be extremely hard to eradicate. The rest of the world has decided that it will live with COVID since COVID turns out to be not as lethal as once thought nor for the most part as debilitating. But China's different approach means that a portion of the world economy is at risk to COVID and that supply chain interruptions from the disease are still possible as well as a setback to global aggregate demand as China's own demand wanes under the strain of lockdowns.

China, however, now shows signs of being able to emerge from some of its difficulties. It hasn't changed its zero COVID policy at least not formally, but there appears to be some ability of the economy to find some footing. China has implemented some targeted lockdowns that have locked down smaller more precise areas- a less ham-handed approach.

In June, the manufacturing PMI index has moved up to 50.2 from May's 49.6. The manufacturing sector is now showing expansion (its strongest since February). In fact, the sector's average reading over 12 months is below 50 so it has been indicating a depressed or barley growing manufacturing sector for quite some time. Nonmanufacturing has jumped very sharply in June. It has reached a value of 54.7 on its diffusion index in June, up from 47.8 in May. Looking at the chart, you can see how sharp this jump appears. The nonmanufacturing index was at a reading of 41.9 just two months ago so nonmanufacturing is making great strides. And this is the part of the economy that tends to be the most harmed by COVID lockdowns. Manufacturers have found ways to run their businesses and even to keep people in the factories living and working in the factories while they are under their lockdown orders. Some factories can continue to operate under lockdown orders. But service sector businesses are businesses that are out in the open, out in the economy, out in that area that gets locked down. When a lockdown occurs, a worker can't get to that business and consumers can't get there either. Service sector businesses simply get locked down too.

The one month rebound in nonmanufacturing is the second largest one month rebound in that index in the last 15 years. It's a very significant jump. The two-month jump, which is also the second largest on record, is the largest increase after COVID struck China.

The manufacturing and nonmanufacturing sectors are showing significant improvements. Whether they continue to do this will depend a lot on what happens with COVID and attitudes toward it in the days ahead.

Quite apart from COVID, global growth is also being challenged by the ongoing war between Russia and Ukraine.

China may also be affected by what could be some slow down activity at U.S. ports since so much from China get shipped to the U.S. There is a longshoreman's contract up for negotiation that will probably not lead to a strike but in the past has been associated with work slowdowns that affected the operations of ports and, of course, the timely loading and unloading of shipping at those ports.

There are also geopolitical tensions in the region as China has more aggressively pursued claims over the South China Sea, violating the territorial waters of some of its neighboring countries. With the U.S. and NATO focused on events in Ukraine and in Russia there is some concern that China could view this as a moment of vulnerability to pursue its claims in the Pacific region.

There is no shortage of things to worry about. And quite apart from the impact of the war on GDP globally, there is also the impact of the central bank war against inflation is being fought on multiple fronts with slow or uneven progress. Consumer spending in the United States has clearly slowed down, that's a very important market for global growth. Consumers are running out of firepower and the central bank is going to be raising rates, an act that will be slowing growth locally as growth globally is likely to be slowing as well. Right now, the focus is on whether central banks, particularly the Federal Reserve in the U.S., will be able to slow inflation without creating a recession. There's an awful lot being written on this subject even though nobody knows the answer. However, I can offer some insight on that subject I simply pointing out that historically and inflation rate this high has never been slowed significantly or stop without running a recession. That's hardly proof of what comes next, but it does put the trade off in a clearer historic light.