Developed Economies Manufacturing Sectors Hit Hard in June

Among the 18 countries in the table that report manufacturing PMI data in June, only four show month-to-month improvements. These countries include China, Russia, Malaysia, and Mexico. In June, developed economies seemed to be hit much harder than developing economies.

Over three months, there are six countries of the 18 that improve compared to their PMI readings of six months ago; these include Mexico, Russia, India, Brazil, Malaysia, and Vietnam. None of the G7 countries are on that list either.

Over six months compared to 12 months, six countries improve including Mexico, Japan, Indonesia, Malaysia, Vietnam, and South Korea. Among G7 countries, only Japan appears on that list.

Recent data have been showing broad improvement of manufacturing areas when compared to 12 months ago. However, as of June the breadth of this improvement is being challenged. Eight countries or regions improve over 12 months compared to 12 months ago. Those include the euro area, France the U.S., Canada, Mexico, Japan, India, and Malaysia. Based on these longer-term comparisons, developed economies are faring much better among the largest G7 countries in the table; only Germany and the U.K. fail to show improvement over 12 months.

There are also eight countries in the table that show rank percentile standings also known as queue percentile standings below their 50% mark. The 50-percentile mark designates the median observation over the sample. Our data period extends back to January 2018. Among those countries and regions that are below their 50% mark are the euro area, Germany, France, the U.S., the U.K., Indonesia, Taiwan, and Turkey. Once again you see a proliferation of G7 countries on this list.

There are still several countries that haven't improved their manufacturing position compared to where it was before COVID hit. These include India, Taiwan, and Turkey. The countries whose manufacturing sectors have improved the most since COVID struck are Germany, Canada, the euro area and Japan.

The data shows some widespread weakness in manufacturing particularly among the developed economies that we think of as the demand centers for global growth. China has a relatively stronger queue-ranking compared the G7 countries and it is also an important source of demand as well as supply. But China has been weak for some time and its outright manufacturing diffusion reading continues to be weak even though it ranks well on this timeline. To underscore this, China shows that since COVID struck its manufacturing reading is only 0.7 points higher, making it one of the weaker economies recovering since COVID struck.

Table 1

Table 2 offers PMI diffusion data according to diffusion reading cohorts. What we see from these data is that in June there is a concentration of observations in what I would call the normal zone readings between 50 to 55 on a diffusion index basis. Fully 83% of the readings reside this ‘normal’ cohort, up from May’s 72% of the readings. In April, there were only 50% in that cohort; also, back in April there were 27.8% that were in the higher cohort from 55 to 60, but there were also 22% in the lower cohort from 40 to 50. So, although there's some widespread slowing so far, the slowing has only brought more countries into the normal diffusion area.

Still from the percentile standings we know that even within ‘the normal range’ a number of developed economies log growth that reads as subpar for them. As of June, there are only 11% of the observations in the 40 to 50 diffusion cohort and only 5.6% of diffusion values in the 55 to 60 cohort. The progression of values over 12 months to six months to three months shows a steady diminishing percentage in the 55 to 60 cohort although only a slightly diminished presence in the 40 to 50 cohort.

Table 2

Assessments Although China has improved slightly on the month it continues to run its zero COVID program which is generally holding back growth and creating supply chain problems for the rest of the world. The Russia-Ukraine war creates more disruptions and more supply chain problems particularly for the availability of some minerals, fertilizers, and agricultural products. Inflation is too-high globally. The Federal Reserve is raising rates aggressively. The Bank of England raising rates and we have the European Central Bank in dire need of raising rates and apparently still planning to do so.

The way ahead These dynamics paint a bleak picture for growth in the future. Clearly momentum already is waning. Ongoing supply disruptions are not going to be good for growth. Central banks raising interest rates to slow inflation will not be good for growth either. The ongoing war between Russia and Ukraine will be an ongoing headache or worse. There are increasing comments made about the prospects for recession in the U.S. More economists are starting to see recession in the U.S. as more likely… and more likely to occur sooner rather than later. The U.S. already has one quarter of negative GDP growth under its belt and in the current quarter there already is a great deal of weakness proliferating in the economy making it a potential candidate for another negative quarter of growth. If that were to happen, the case for a recession would probably be sealed although the central bank would still have a great deal of work ahead of it since the inflation rate continues to linger in the U.S. Inflation remains too high in the U.S., in the UK, and in the European monetary union where it is well above the pace that these central banks have sought. Inflation is not simply a problem in one country. Inflation is a broader problem, but it must be fought on an individual country basis. I look for that to continue in the months ahead.