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Economy in Brief

Manufacturing PMIs Show Slippage in July
by Robert Brusca  August 1, 2022

The manufacturing PMI gauges weakened broadly in July as there was improvement in only 16% of them in the table, a group consisting of 18 significant international manufacturing centers. This follows June where 22% of the categories improved month-to-month and May when 39% of the categories improved month-to-month. Monthly improvement is becoming less common.

Viewed over broader horizons, over three months 22% of the categories improved, over six months 22% of the categories also improved, and over 12 months, 28% of the categories improved. The three-month calculation compares three-month diffusion to the average over six months, the six-month comparison is to the average over 12 months while the 12-month comparison is to the average of 12-months ago.

The erosion is somewhat slow as over three months the median manufacturing PMI reading is 52.1 compared to a median of 52.9 over six months and of 53.2 over 12 months. On a monthly basis, the median the PMI for this group is at 50.6 in July, down from 52.1 in June, and 53.7 in May. The slippage is steady, but so far it is not severe

However, this ongoing weakness has taken a toll. The queue standings, that look at the current PMI readings by country ranked over the last four and a half years, show standings below the 50% mark (which denotes the median in each case) for all except 6 reporting countries. The median rank standing on this timeline is the 32nd percentile, which puts the median in the lower one-third of all medians in the last four and a half years. These are weak numbers. Still, we also can contrast the rank standings to the position of the current readings in their high low range for the same period. On that basis, there are only two observations, Germany and Taiwan, that are below the midpoints of their respective high-low ranges. The average percentage standing in the range is at its 65th percentile which is a moderately firm standing above the midpoint.

Looking at performance of the manufacturing sector for this group since COVID struck in January 2020, we find the average change in the manufacturing PMI on that timeline is 1.5 points. It tells us that essentially the PMIs are back to a slightly higher level than they occupied before COVID struck in January 2020.

Table 1

Table 2 digs into the distribution of the PMI values across the various members. In July, 50% of the members are in the 50 to 55 PMI range, which is essentially the range for normal to moderate growth. However, 44% of the observations are in the 40 of the 50th percentile that denotes a moderately weak zone. Together, this is a sharp deterioration from June when there were 89% of the reporters in the 50 to 55% category and only 11 in the 40 to 50 cohort. Similarly, in May there were 72% of the reporters in the 50 to 55 range with only 17% in the 40 to 50 range and 11% in the higher 55 to 60 range.

Quarterly data continue to show a tendency of readings to gravitate to weaker levels. Still, 70% appear in the 50 to 55 range over three months with only 24% in the 40 to 50 range. That is a lot stronger than in July alone, but it represents a weakening from 12-month trends. There is a stronger configuration over six months with 59% in the 50 to 55 range and 23% in the 40 to 50 range but also nearly 18% in the stronger cohort. Over 12 months 51% of the reporters are in the 50 to 55 range with nearly 27% in the stronger 55 to 60 diffusion range against 20% in the lower, 40 to 50 diffusion range. Looking at the progression from 12-months to six-months to three-months, we see a sharply diminished percentage of reporters in the higher 55 to 60 range and a slightly growing percentage in the 40 to 50 percentile range with the sharp increase of reporters clustering in the 50 to 55, normal range.

Even so the data from 12-months, to six-months, to three-months show that the percent of reporters where conditions are improving is below 25% on each timeline. The number of observations on reporting countries with PMI gauges below the 50% mark remains relatively moderate except for July when the number of sub 50 observations balloons to 8 compared to the previous high of five over six months.

Table 2

There is a clear message in this report of manufacturing slipping. And there is also a clear message that the slippage has been slow. Readings have moved down to significantly weaker levels than we have seen for some time. There are fears of an encroaching recession and one may be in train; but, at least so far, if one is coming, it's coming very slowly. The risks, however, remain essentially what they have been. COVID in some form continues to circulate. China continues to pursue a Zero-COVID tolerant policy that has driven its manufacturing sector to contraction this month. The U.S. Federal Reserve, the ECB, and the Bank of England continued to battle very high inflation. And the war between Ukraine and Russia continues full-bore. There is very little change in this risk profile this month as deterioration on the economic front continues.

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