Global Manufacturing Slows Further (S&P Global PMIs)

Among the 18 countries and regions surveyed in August, 13 of them worsened month-to-month. That’s a clear bias in terms of numbers of countries that saw manufacturing weaken in August. Among the exceptions were Indonesia, China, Russia, France, and Turkey.

Over three-months compared to six-months, once again there are 13 members of this group that show worsening. Over six-months compared to 12-months, there are 16 members that show worsening. Over 12-months compared to the average from 12-months ago, there are eleven members out of 18 that show worsening.

The median observation in August deteriorates only 0.2% from the month before. Over three-months, the median observation deteriorates by two points from the six-month average. Over six-months, even though there are more worsenings than improvements, there is a slight, 0.4%, improvement in the median observation compared to the 12-month average. And over 12 months, despite the lowest worsening count of all these horizons, there was a decline in the median of 1.7 points.

Queue rankings On balance, the worsening is gradual and ongoing, but it is bringing the manufacturing PMI levels down to much lower levels. If we look at the queue rankings over the last 4 ½ years, there are only four out of 18 members whose August observations rank above their median values over the last 4 ½ years. Those are Russia, India, Indonesia, and Malaysia. As for large economic areas, the euro area has a 32.1 percentile standing, the U.S. has a 22.6 percentile standing, the U.K. has a 3.8 percentile standing, Japan comes close to its median with the 49.1 percentile standing, and China has a 17-percentile standing.

PMI values since before Covid struck Half of the respondents in the table have higher manufacturing PMI standings than they did in February 2020 on the brink of COVID striking. However, the euro area, Germany, France, and the U.S. show increases that are improvements of barely one point or less over this span of 2 ½ years. The strongest gains from February 2020 are from Japan that’s up by 3.7 PMI points, and Russia that’s up by 3.5 points. After that, Vietnam is up by 2.2 points (based on its July reading), and Malaysia is up by 1.8 points. All-in-all conditions have not been very robust over the last 2 ½ years.

Table 2 (below) provides some background on a distribution of the manufacturing PMI data. In August, the 50 to 55 cohort holds that 44% of the observations. In July, it holds 50% of them and in June, it holds nearly 89% of them. Similarly, in the cohort just below this (40% to 50%), we find 50% of the observations for August, compared to 44% for July and 11% for June. Clearly there has been some packing in of estimates below the 50% level. While the medians continued to resonate at levels above 50%, clearly a lot of manufacturing sectors are not above 50% and a lot are trending weaker. Three-month, six-month and 12-month evaluations give a slightly different picture. In that sequential timeline, there is an increase and the proportion of countries in their normal (50 to 55) zone. Over three months it goes up to 61% from 58% over six months; it’s nearly 52% over 12 months. In the lower 40% to 50% cohort, there is still a progression to more members as well: there are 35.2% over three months, 28.7% over six months and 21.8% over 12 months. This can happen because there are fewer in the higher cohort from 55 to 60: 3.7% over three months, 13% over six months and nearly 26% over 12 months.

Proportions improving on various timelines Separate statistics in the table show us divergent trends. Monthly from June to July to August we see a rising proportion of firms whose PMI readings are improving there are 22.2% in June that slips to 16.7% in July and then rises to 27.8% in August. However, looking at the broader sequential patterns, we see that over 12-months 33.3% of the reporters improved compared to 12-months ago but over six-months only 27.8% improved compared to the 12-month average while over three-months 22.2% improved compared to the six-month average. The monthly data shows somewhat ambiguous trend with a significant improvement in August while the broader sequential trends clearly show a deterioration.

PMIs below 50 (contracting manufacturing) The count of countries with PMI readings below 50 diminishes slightly from 12-months to six-months to three-months following from a count of five over 12-months to four to three on that profile. But over the recent three months, the opposite condition holds as in June there were only two below 50, whereas in July that rose to 8, and in August that rose to 9.

The PMI value at 50 is enshrined as an important marker because it is the dividing point between the sector advancing or declining. In August, nine of 18 members show values below 50 indicating actual manufacturing declines. That's not surprising with 50% of the observations and the 40 to 50 cohort it's exactly what that means and there are none in the lower cohorts.

Global weakness and policy - a tangled dance The global status seems very clear in pointing to an ongoing slowdown in the economy. However, inflation also seems to have broken with energy prices falling, helping the domestic measures of inflation to improve. What we're seeing here is one piggybacking on the other as energy prices are falling allegedly because we're expected to see weakness in the future. If weakness does not develop, oil prices and interest rates will rise even more. If economies do slow, oil prices will fall further and so can inflation. Then central banks can feel relieved and recalibrate their needs. The question is: when we reach that fork in the road which way will we go? For now economies are sliding, but the U.S. job market has shown some new signs of life- is that for real or not?