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Economy in Brief

PMI Rebound Runs Out of Steam in October... Especially for Services
by Robert Brusca  October 22, 2021

PMI metrics were mixed across the board in October. Of the eighteen monthly assessments 6 each for manufacturing, services and the composite, eight were stronger and ten were weaker. The weaker responses are concentrated in the EMU region as a whole plus EMU members France and Germany. Japan posts stronger readings for all three metrics while the US and the UK each post two stronger readings with each showing a weakening on the month only for manufacturing.

However, the longer view is clearly that an improving trend has been in place. That can be seen in the graphic that shows the uptrend that is being moderated by recent weakness. In fact, there is weakness across the board for all metrics in August and in September only four of eighteen metrics strengthen over those two months (those are for the UK and Japan and are for services and the composite). Is the trend changing?

Monthly developments
Europe faces an overwhelming count of weaker readings for the three PMI gauges from August to September to October. On that same monthly timeline, the UK swings from three weaker readings in August to only one each in September and October with manufacturing continuing to weaken over the full period. Japan goes from weaking in August to having two readings strengthen in September and three in October. The US carries across the board weakening trends from August to September but logs two stronger readings for the composite and for services in October.

Broader trends
However, on the sequential timeline where we look at average values over 3-months compared to six months and six months compared to 12-months and 12-months compared to 12-months ago, momentum shows improvement uniformly for all the 12-month averages. The 6-month averages improve for all observations except Japanese services. Over 3-months conditions weaken uniformly in the US, Japan, and the UK. EMU, Germany, and France each show weakening only in manufacturing as conditions over 3-months improve compared to 6-months for the service sector and for the composite.

So, while the trend is still clearly upward, the trend is also clearly being challenged by near term weakness which is of a mixed nature. Europe is struggling to improve while the US, Japan and the UK are succumbing to weakening 3-month trends – but that assault contrasts to monthly strength in October.

Is the trend your friend or is starting to bend?
Clearly this is a time of turmoil for trend. Is the trend changing or not? That is a question on which there will be mixed opinions since there is mixed evidence. It is, in part, a question about what policy does from here on out as the US seems to have monetary policy on the verge of tapering and the EMU is considering damping its stimulus as well.

However quite apart from the PMI gauges there is still solid job growth in the US and still dropping weekly jobless claims. In Europe unemployment rates continue to work lower. Japan has a new Prime Minister, and it could be on the verge of policy changes geared to create more stimulus. The policy cycle is hard to pin down there. The US also has a much more liberal government that is trying to past a number of stimulative propositions and at least some of them are like to be enacted further bolstering demand near term.

At the same time inflation has been rising and the outlook for inflation is spit with central bankers calling it temporary while a number of corporate executives are taking the opposite pitch. Corporations are still in the midst of raising prices on a broad array of consumer goods and some of them see inflation as even higher in 2022 -unlike the central bankers. This could turn out to be a turbulent time for markets and for policy.

For now, GDP growth still is relatively strong but also in a slowing mode as the sharp rise from the pit of the Covid-induced recession simply had to run out of steam. PMI gauges in the table average a standing of 60.4% for the composite reading, of 74.8% for manufacturing and of 64.8% for services. These are moderately strong readings. The readings position the current levels of the sector PMIs in their respective queues of data back to January 2017. These readings can be 100% at the max and 0% at the minimum while the median for each series is at the 50% mark. Compared to their medians most sector readings are higher, but most are more moderately firm readings rather than strong readings. In fact, two important economies Germany and Japan each have a composite standing and a service sector standing below their respective medians. Only the UK and the US have across the board standings that are strong (in the 80th percentile or higher).

Raw PMI readings

Looking at the raw PMI data (not shown) only Japan has PMI readings below 50. When the raw PMI data are below 50, sector contraction is indicated. Japan shows contraction in the composite and in the services indices for August and September, but it posts readings that shows not just improvement but sector expansion in October. Japan also posts average raw PMI readings below the 50-mark for its 3-month, 6-monthand 12-month averages of the composite and service sectors. So, Japan has been quite a bit weaker than the other areas in the table for some time. In fact, no other country or region has any raw PMI reading below 50 in August September or October of for any of the averages (3-months, 6-months, 12-months). Japan stands alone in fighting off that sort of weakness.

Summing up and outlook

All this makes for a difficult policy environment. The good news is that the covid wave is abating and that could allow more strength to spread and could feed stronger PMI readings in the months ahead. But that depends on economic dynamics, the degree and stubbornness of supply chain problems and various policy responses. There is still uncertainly in all these areas. In simple terms the graphic reminds us that the easy part of the recovery is over. And while there may be more tools to deal with the virus, we are finding that some of them decay and must be renewed, complicating the policy response. This creates unknown possibilities for subsequent waves of infection to emerge or for new variants to develop. So, while the virus diminishes as an immediate risk, it may continue or worsen in the future. For now, the virus wave abating will create a tail wind for growth. But the outlook still has great deal of uncertainty on many fronts.

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