Haver Analytics
Haver Analytics
Global| May 04 2023

Service Sectors Support Global Composite PMI Firmness

The average unweighted composite PMI readings from S&P Global for April show another monthly increase as the average ticks up to 51.5 from 50.5. The median moved up to 53.8 in April from 52.8 in March.

Small, if against the grain, changes The movement in the various series are small; however, what is striking is that they are movements against the grain at a time that inflation is high and central banks are still raising interest rates – and have been doing so for some time. Just yesterday, the Federal Reserve hiked interest rates and today the ECB put in another rate hike on top of its rate profile. In both cases, inflation is still well above their targets and only now is the U.S. short-term interest rate starting to be on an even-keel or slightly higher than the major inflation indexes used to gauge inflation in the U.S.

Resilience or bad analytics? The perception that economies have been resilient in the face of rate hiking is a perception that comes largely from the fact that rate hikes have gone on for such a long time. In the case of the U.S., it's a record increase of interest rates in this rate hike cycle. While, on the face of it, that sounds impressive, the fact of the matter is simply that the U.S. had allowed itself to get so far behind the inflation rate when it rose, that it has taken a record run of rate increases to get the federal funds rate marginally above the trailing 12-month rate of inflation… on a few measures. And the ECB is not there yet. So, people who like to look at rate increases and gnash their teeth over how the market is performing, and growth has endured, have been somewhere between surprised and disturbed at economic resilience. But, if you're the kind of person who looks at the levels of real interest rates relative to inflation, then you have understood what's been going on and why there's nothing particularly remarkable about this. Even so, it's surprising that as central banks, the Fed in particular, have taken away stimulus - even though rates haven't really gotten to a restrictive mark - growth has held up as well as it has.

A unique paradigm It is difficult to compare these times to any other times because the world's economies are so much on the same cycle because of COVID having struck. COVID struck all countries that about the same time and from that point countries have had slightly different experiences with their economic recoveries, but all of them are recovering from the same sort of shock not so much from the disease but from the policies that were pursued to try to contain the disease.

So… how good is growth? To assess the global PMI data, please shift over to the right-hand column; it shows very moderate queue percentile standings. The average standing is at the 63rd percentile with the median at a 69th percentile standing. Percentile standings place the current observation for each economic unit in the queue of data from January 2019 to date. The queue percentile expresses the position of the current observation in that queue of data. On this metric, the median for the period occurs at a ranking of 50%. So, these rankings this month are ‘firm’ rankings of 63% in standing, 13 percentage points above the median which means that 13% of the observations lie between the median and the current value. It also means that the highest value lies some 37% above the current value. In contrast, the range percentiles position the current observation between the highest and lowest values of the period expressing the current reading as a percentile of the high-low range.

Momentum Momentum is also telling, and we see a big difference between what's happening in the last few months and the broader trends. In the current month of April, there are only five out of twenty-five jurisdictions that show slowing; this compares to nine in March and five in February. In April, there are only four jurisdictions with PMI values below 50 (where PMI diffusion values say activity is contracting); there were only six in March and only six in February. Looking at averages over three months, we get similar sorts of statistics with five jurisdictions below 50 and five jurisdictions that are slowing. But over six months, eight of the twenty-five jurisdictions are below 50 and fourteen of twenty-five are slowing. Over 12 months compared to 12-months ago, there are seventeen jurisdictions that are slowing and six with PMI values below 50.

Future risk Momentum is mostly negative in a longer-term sense which is to say that the PMI values are broadly losing value on longer-term comparisons; they are more resilient on short-term comparisons. But their PMI levels are not high. However, neither are they threatening recession, and this is a bit of a conundrum for policymakers. Inflation is still high; central banks continue to raise rates, but central bankers, much like the man-in-the-street are concerned that they have raised rates so much already and are concerned about what might lie ahead. We can also see this in terms of money supply growth. Money supply growth boomed globally as central bankers took action against COVID in an economic slowdown. Money growth has since busted. In the U.S. the monetary aggregate M2 is posting its first decline in the nominal money stock in over 60 years. Despite this evidence of some sort of economic robustness, there still is concern that there is still the other shoe that has yet to fall and that economic forces do not necessarily play out in a nice smooth linear fashion… Because of the substantial rate hikes and the sharp slowdown of money growth, central banks are wary they could be staring at some very difficult conditions ahead. These concerns are augmented and complicated by banking sector issues as the U.S. has just had another large bank that had to be saved and as the authorities continue to opine that the banking system is stable and safe.

Banker’s plan…or do they scheme? Central bankers globally face many of the same issues. Inflation in the U.S. and economic challenges have eating away at the strength in the dollar, raised gold prices and it's unclear where oil prices go next as there's been some willingness on the part of OPEC-plus to cut back production to try to support oil prices when they get weak. As a result, we can have no presuppositions about inflation that continues to linger and has become somewhat entrenched in the wage bill. Still, a few U.S. politicians keep trying to claim that raising interest rates doesn't help anything because it doesn't attack the source of the problem. The source of the problem at this time has spread…it is pretty much everywhere, and interest rates need to rise above the rate of inflation if inflation is going to be contained. So, let’s hope politicians turn their attention to fiscal matters, where they have plenty of challenges, and leave monetary policy-making to experts who do not benefit from political interference.

  • Robert A. Brusca is Chief Economist of Fact and Opinion Economics, a consulting firm he founded in Manhattan. He has been an economist on Wall Street for over 25 years. He has visited central banking and large institutional clients in over 30 countries in his career as an economist. Mr. Brusca was a Divisional Research Chief at the Federal Reserve Bank of NY (Chief of the International Financial markets Division), a Fed Watcher at Irving Trust and Chief Economist at Nikko Securities International. He is widely quoted and appears in various media.   Mr. Brusca holds an MA and Ph.D. in economics from Michigan State University and a BA in Economics from the University of Michigan. His research pursues his strong interests in non aligned policy economics as well as international economics. FAO Economics’ research targets investors to assist them in making better investment decisions in stocks, bonds and in a variety of international assets. The company does not manage money and has no conflicts in giving economic advice.

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