Global Composite PMIs Show Resilience; U.S. Is an Exception

The Standard and Poor’s Global composite PMI data for May show some degree of resilience. Among the 22 countries and regions featured in the table, the average composite PMI rating rises to 53.5 in May from 51.5 in April. The median reading rises to 54.0 from 53.8. There are only two jurisdictions with readings below 50 indicating contraction; this compares to three in April. For both months, the readings on the number of contractions are quite low. However, the number showing slowing rises to 11 in May compared to 5 in April.

U.S. trends diverge- The fork in the road... To avoid confusion, let me point out that I have presented both U.S. measures in the exhibits. In the table (below), for comparability, I have the U.S. composite as presented by S&P so it's completely comparable with everything else in the table. However, in the chart at the top, I present the U.S. nonmanufacturing or services PMI from the ISM, the survey I prefer. The ISM is showing much more weakness in the U.S. than the S&P reading on the services sector. The chart reveals significant weakening in the U.S. compared to other members whose surveys are based on S&P data. The S&P survey shows some strengthening in the U.S. for the composite, not just less weakness.

S&P readings show resilience overall... The data in the table also showed that the average reading is increasing sequentially: from 12 months to 6 months to 3 months from 51.6 over 12 months on average to 52 over 6 months on average to 53.3 over 3 months on average. The median region also increases from 51.2 over 12 months to 51.8 over 6 months to 53.5 over 3 months. S&P data are consistent with the notion that there's been some firming in the global indexes and a back-off in activity in the manufacturing sector.

Still, there is little evidence of composites showing contraction. The number of jurisdictions with readings below 50 over 12 months is five, the same as for 6 months; that number diminishes to 3 over 3 months. The number readings that are slowing over 12 months compared to 12-months ago is 20; the number slowing over 6 months compared to 12 months is 7; the number slowing over 3 months compared to 6 months is 3. In terms of either slowing or outright contraction, both approaches show that there is less weakness in train according to the S&P readings applied to sequential data. Recall that the monthly data do show that there's a more significant broad slowing in May compared to April, but that's on the month-to-month comparison alone.

Percentile standings have become more midrange Percentile standings based on the queue method of assessment show only three jurisdictions with readings below their medians since January 2019. Those three are Sweden which is exceptionally weak with the 2% standing, Egypt with a 36.7 percentile standing, and France with a 40.8 percentile standing. All the rest have standings that are above their historic medians which means they have queue percentile standings above the level of 50. India in May logs its highest composite PMI reading since January 2019; Japan logs a 98-percetile standing on the same period.

Is resilience, new real, or an illusion? This past Friday the United States issued an employment report for May that has put the markets back on their heels as the job gains in that report were stronger than expected. In the U.S., markets have repriced and are no longer looking for the Fed to cut interest rates before the end of the year. The global economy appears to be responding much the same way, showing this as a period of some resiliency. However, the picture is still not crystal clear; in the U.S., the unemployment data for May also showed a jump in the rate of unemployment even as it showed strong wage gains and very strong job gains. S&P Global PMI data continue, for the most part, to show very weak manufacturing standings and the composite indexes tend to be driven by their services components which, in turn, tend to be driven by job market features which have continued to be strong. Do we really want to be guided by that?

If growth is unsustainable, it won’t be sustained! This seems to be a situation in which things are going to be strong until they aren’t, which isn't a very satisfying way to look at things. I am not as convinced that the proper interpretation of the U.S. data for May is that the U.S. or global economies are more resilient. The U.S. economy has been more resilient and now it's starting to show some strain in terms of a rising rate of unemployment. There has been more weakness in manufacturing, and we've also seen layoffs particularly in the tech sector. There are clear signs of erosion sprinkled in among the somewhat late admissions by some analysts that the economy has been more resilient than expected. Globally economies have been showing service sector resilience for some time; there's nothing particularly new about it. What is new is that markets have given up fighting the Fed…What is so surprising about the resilience is that we've seen this U.S. and global resilience occur even as U.S. and global interest rates have moved up significantly. We also get mixed signals from the inflation data where PPI inflation generally has fallen globally relatively sharply while global CPI data - particularly for core or ex-energy measures – has tended to show that inflation is stuck at a relatively high level. Clearly, the global economy has cross currents. As we well-know from previous recessionary episodes, once a certain level of weakness is ‘tripped,’ and as an economy heads for recession all bets on resilience are off. I view this as a time to be cautious about assessing current economic conditions and about thinking that we know what comes next…or when it comes.