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Economy in Brief

PMIs Show a Rift Between Haves and Have Nots As Mexico Succumbs to Trumponomics
by Robert Brusca  March 1, 2017

What jumps out at you in the table of manufacturing PMIs ranked on their performance since January 2012 is the abject weakness in Mexico. The chart at the top shows that the Mexican manufacturing PMI is moving opposite to the U.S. and Canadian gauges over the last 10 months. The U.S. and Canada continue to move more or less together.

Trade and global economic performance are going to be greatly affected by what happens in the U.S., a huge global consuming state and one with a persistent current account deficit. The U.S. has been an important source of demand for the exporters of many nations. In an address to Congress last night, President Donald Trump began to release his plan or vision. The President made it clear that he wants a level playing field and that in his view we have not had one for some time. He seems willing to be quite aggressive to pursue the remedy he wants. He is not afraid to step on some toes.

Still, there are international rules for trade. And while Mr. Trump offered up a new presidential order that steel for U.S. pipelines will be US-made, that in fact is not allowed according to international agreements. As the U.S. moves aggressively to try to restore its competitiveness, to make jobs, to rebuild its economy to restore its dominion over its borders and to create fairness in trade, we will have to keep an eye on how these shifting sands in the U.S. will affect U.S. trade partners. There are distortions that do effectively restrict U.S. exports or encourage U.S. investment to leave the country. But redressing those things may be quite difficult in the context of existing trade rules. We can see already that there has been a pronounced negative impact on Mexico. The Mexican manufacturing PMI is still above 50; Mexican manufacturing has not turned lower. But its degree of expansion has been cut back sharply. And its current 6.5 percentile standing among its values since January 2012 speaks volumes about what Mexico is dealing with.

India, Indonesia and Turkey are relatively weaker than Mexico with sub 50th percentile standings. They are experiencing different causes for their weakness, but they are reminders that the global recovery continues to be uneven even as it has gained some pace this month.

The U.S. and Western Europe generally are doing very well with PMI rankings in their top 90th decile or in the upper portion of the 80th decile expressed in terms of queue standings. The table is very much about the haves and have nots with very few countries having PMI rankings that are 'in the middle.'

The U.K. has one of the more moderate manufacturing PMI rankings in the table at a 70th percentile standing. It has been slipping, of course, on fears of what Brexit will do. The U.K. has been an important and significant economy for Europe. It is the second largest economy in Europe. It provided balance with Germany within the EU, but soon it will stop providing that function. It is poised to leave the EU area with unknown consequences for both the U.K. and EU. The process right now is very drawn out and maybe that is for the better. It will be much better if the U.K. and if the EU can conduct talks in a calmer environment when the sting of being 'jilted' has dissipated in Europe. Still, Europe has some tough choices to make in deciding how it wants to deal with the U.K. as an outsider. There are many commercial ties between the U.K. and EMU and other EU members.

China is undergoing severe economic upheaval that is forcing it in different ways to re-set the way it conducts business. China has been slow to replace its model of export-led growth. But the rest of the world - the U.S. in particular - is not about to continue absorbing Chinese exports to stoke Chinese growth as it has in the past. China needs to adopt and to promote 'plan-B.'

There is a lot in flux in the global economy. The Trump speech sort of throws down the gauntlet for the U.S. even though the U.S. has a long way to go to flesh out just what its policies will be, what it intends to do and how it intends to deal with its trade partners. But as we peruse the international scene, the U.S. is not alone in this. It is important that the U.S.'s trade partners and others prepare for change rather than fight to keep a system that has not been fair and has not produced anything like fair results. A number of countries have run policies and continue to run them with mercantilism at their base. That has to stop and that will not be easy to do.

My view on this is that it has been the exchange rate system that is broken. Because exchange rates no more act to restore current account balance and instead seem to be manipulated to create and preserve chronic trade surpluses and deficits, it is this system that must be fixed. And while changes in U.S. tax policy, or a border tax, or other commercial policy moves might be layered on top of this flawed financial system, those are nothing but patches being glued on haphazardly as new aberrant layers on top of a deeply flawed system. What is needed are new rules governing foreign exchange rates intervention, reserve accumulation and the like, not simply some quick trade policy fix. If others come to see Trump as serious, perhaps this more ambitious policy of monetary reform could be advanced. But so far, no one has taken up the call.

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