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Economy in Brief

Global Manufacturing PMIs Perform; But What the Heck About Demand?
by Robert Brusca  April 3, 2018

There is a definite softer spot being hit by the global PMIs in March. The unweighted PMI average is at 52.5 in March, down from 53.2 in February and 53.5 in January. In addition, 12 of 17 country indexes (excluding the EMU aggregate) fell month-to-month. Only six fell month-to-month in February as well as in January. The average queue percentile standing is only in its 65th percentile, a moderately firm reading. Recall that the queue percentile standings put the median diffusion score at a queue percentile standing of 50%. Anything above 50% is above its median, not just above zero.

Moderation strikes
Trends show weakening in the moving averages as well. The three-month average of PMI values is lower than the six-month averages in 7 of 17 countries in the table. That is short of half, of course, but it is a large proportion. Only four are lower over six months than over 12 months. And only three have a 12-month average that is lower than the average calculated over the 12-month period of one year ago. Russia, India and Vietnam are in that grouping. Russia is the only country that shows sequential weakening on that score, but the U.K. is close to doing just that as its six-month and 12-month indexes have the same values. Still, 13 of 17 readings have higher three-month values than 12-month values so the global economy has not stumbled into a quagmire of quicksand. But for many, the differences between their 12-month average and the three-month average are quite small. It is a case of ‘momentum lost.’ But it is not so clearly ‘weakness gained.’

Few are at the extremes
Twelve of 17 countries have readings above the 60th percentile queue standing mark. Only South Korea, India and Vietnam are below the 50th queue percentile mark (that represents performance below its median). Malaysia also is close to that mark. Only Canada, the U.S. and Brazil have readings in their respective 90th queue percentiles.

These distributions tell us that there is still growth. Values below 50 are in the distinct minority. And although there is a widespread trend to slowing, the degree of moderation is itself of a modest variety.

The German (and Asian) growth models are not exportable!
Switching focus here, I have inserted a table (below) on retail sales in EMU/Europe. The German retail sales report is fresh news today and it shows three straight monthly drops (yikes!). This is the result for Europe’s ‘strongest’ economy. To me, Germany is a prime example of what is wrong with the global economy. Germany is an economy that plays the game for itself and does not seem to care much about its ‘neighbors.’ Exports are about 48% of German GDP while imports are about 40% and that leaves Germany with a massive current account surplus that is about 8% of GDP. Germany lives off the domestic demand created elsewhere. The Germans are fiscally conservative and are running a near-balanced budget. If every country did that, global growth would implode.

Export-led growth model meets domestic austerity
Yet, Germany thrives and lives and trades in a global economy starved for demand and Germany is running like a top by gobbling up demand outside its borders and generating very little itself in return to benefit other countries. Despite Germany’s strong position, consumption in Germany is simply weak. In real terms, retail sales are falling at a 3.1% annual rate two months into Q1 2018. Yet, German official agencies have been raising the outlook for growth for this year.

Of all the countries in the retail sales table, three of them are from EMU and three are from the rest of Europe. It doesn’t matter where they are from. All show dropping- not just slowing- retail sales over the last three months. All 12-month percent gains in real retail sales are below 2% except in Portugal.

So, output growth is all but certain: but what about demand?
A running gristmill is good, but someone must also eat the bread
So (switching back to the original theme, PMIs...), how does global output continue to advance if the world’s strongest economies are not going to generate domestic demand? U.S. retail sales also have fallen for three straight months. Despite the strength in output (remember that the manufacturing sector is a relatively small part of GDP and a much smaller part of employment), what is the state of demand? It will take a DEMAND pick-up to sustain output growth in manufacturing. Asian economics tend to run export-led growth models. Where will demand come from if the U.S. and Europe are not providing it? Riddle me that?

Trade wars or seeking the Kumbaya economy?
Moreover, the U.S. is lashing out at countries that have simply hooked their growth wagons to U.S. demand and have been unfair in offering U.S. firms access to their own local markets. Quite apart from trade wars being dangerous, the U.S. is not taking a stand to promote global growth here. The U.S. is taking a page out of the German book (das Book?) and focusing on itself more than on its contribution to the global economy. It is trying to get to a position where it will ‘share’ less of its domestic demand and (hopefully) force others to develop their own domestic demand that they will then ‘share’ with the U.S. among others. Free trade ought to be a ‘share and share alike’ model rather than one where ‘some are more equal than others’ and hog all the surpluses all of the time.

The Vampire Model
However, this is an extra tough transition to make especially given the current state of global trends and the main players since Germany will not want to change nor will China - or others for that matter. They have become wedded to a different ‘VAMPIRE model’ in which they suck the life blood of domestic demand out of an economy but keep it going by injecting it with debt.

The fallacy of composition- will it lead to conflagration?
The Trump approach is not kinder and gentler but maybe that would not work in any event. We can see that there is a failure of the gears to mesh on consumption and production trends and it’s too soon to say what that will mean. Consumer confidence measures are still high so we might think that it means good things for consumers and that demand will come back. But I suspect that consumers’ good moods are more from the sense of job security garnered from tight labor markets and a strengthening goods sector. But since globally wage trends have been retarded, consumption is not keeping pace with output. Are we now finding that output-led (as in export-led) growth is not really sustainable? One or two or several might do it, but EVERYBODY can’t do it together!

Divergence may not be submergence
Maybe that is not where we are at the moment. Maybe seasonal or weather factors are off and maybe consumers will simply come back to Saks-istrano like birds returning to Capistrano. But certainly the consumer spending trends have diverged from consumer confidence trends and manufacturing PMI trends.

Something’s got to give...
My point is that things are out of alignment and something will have to bring them back into place. Will output prove to have been too expansive? Will inventories build and lead to cut-backs? Or, will consumption simply pick-up? Will we all live happily ever after? Those are questions worth asking and they point to trends that are worth following quite in addition to keeping tabs on the trade war. Remember that the U.S., quite beyond the trade war aspect of its actions, is actually pushing for a revamp of how global trade works. If it is successful in introducing a system based on fairness, everything will work differently.

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