Economy in Brief: March 2023

China's manufacturing PMI in March was lower at 51.9, down from 52.6 in February. It continues to reside above the January level of 50.1. The table offers a look at 12-month, 6-month and 3-month averages; it also looks at point-to-point changes over 3 months, 6 months and 12 months. The momentum changes show that the headline of the index is higher over 12 months, higher over 6 months and higher over 3 months. The momentum changes are simple period-to-period changes; the table shows the largest increase in the manufacturing PMI by far is over 3 months gaining 4.9 points accounting for more than all the increase over 6 months and 12 months. The manufacturing PMI ranked on data back to 2005, presented as a percentile, is at a 67.7 percentile standing which places that reading just into the upper one-third of its range over this period.

The report shows a number of cross-currents, but mostly of a minor variety. For example, in March almost all the categories are weaker than they were in February, but the March values are almost all higher than they were in January. This marks February as a strong month more than it marks March as a weak month.

Trends on averages Data on averages over 3 months, 6 months, and 12 months show that there are month-to-month increases across most categories sequentially. The three-month averages compared to six-month averages show all categories are higher. Comparing 6-month averages to 12-month averages, all the categories are higher except employment that is slightly lower. Comparing 12-month averages to the 12-month average of 1 year ago, most of the categories are weaker; the exception is the ‘stocks of finished goods’ metric that is slightly higher on this average.

Period-to-period changes Applying the same process to simple changes, over three months the only category that is weaker is input prices. Looking at the six-month change, again, input prices are the only weaker category and the same is true looking at 12-month changes. China is showing expansion in all the activity categories compared to some weakness in input prices from 12-months to 6-months to 3-months.

All evaluation methods show solid results Setting aside the weaker readings in March compared to February, the period average momentum changes show substantial firmness or strength indicated by changes. If we evaluate the same metrics on their average level changes, we get roughly the same interpretation. When we're evaluating all the components on a timeline back to 2005, we find the queue standings of delivery times, order backlogs, and the stocks of finished goods all have standings in their 80th percentiles. Imports and output have standings in their 70th percentiles. The new orders metric is on the threshold of a 70th percentile standing at 69.1. Purchases of inputs is right at a 69.1 standing as well. Only input prices have a standing below their midpoint (below 50) since 2005. That’s impressive.

But are the Chinese metrics really that impressive? On balance, Chinese showing a great deal of positive momentum and strength compared to where its PMI indexes have been in the past; however, a lot of this also appears to be illusory strength. What I mean by that is that in March the strongest category is output with a 54.6 reading; that's not a particularly strong raw diffusion index – and it’s the strongest one of the bunch. Its ranking is strong/high when we look at changes over various periods or when we evaluate its level compared to a time span since 2005- but this period has been a difficult time for the Chinese economy. The output rating of 54.6 in March has a 70th percentile standing; however, the delivery speed reading up at a 50.8 reading which is barely above 50 - barely above the break even for increasing or declining - has an 81.6 percentile standing! How could such a weak diffusion reading have such a high percentile standing? The answer is a legacy of weakness that makes moderate reading appear strong. China has a number of weak-to-moderate readings for March. The PMI components that wind up having strong momentum and strong readings from compared to their recent past are simply reading with weak historic baselines.

Component strength Looking at PMI levels, there are 4 of 11 readings in March that are below 50 - and ‘50’ is the diffusion value that is the dividing line between increasing or decreasing. So 4 of 11 readings have PMI diffusion values so low that they point to declines in those categories; yet, these four categories average a standing at the 73.8 percentile. There are another four components that have readings between 50 and 50.9 indicating very moderate increases in the underlying series. These moderately firm PMI readings have lower average standings than their weaker diffusion index counterpart at an average percentile standing of 62.3%. The only reading at 51 is the manufacturing PMI headline with a 67.7 percentile standing. There are no readings at 52. At 53, there are two readings: one for new orders and one for purchases of inputs; they have an average standing at the 69.1 percentile. Finally, there's output with the highest reading overall at 54.6 that has the 70th percentile standing.

The monthly EU Commission Index for the European Monetary Union showed slight slippage back to 99.3 in March from 99.6 in February. This compares to 99.7 in January and 97 in December. Obviously, the sense of rebound here reveals a very shallow and slow-taking rebound. The industrial sector had readings of zero for the past two months, weaker than the January reading. Consumer confidence was at -19.2 in March, not much changed from the -19.1 in February, but it's a slight improvement from -22 in December. Retailing slipped on the month with a March value of -1 compared to zero in February and a slight improvement from -3 in December. Construction eased lower with the reading of +1 in March after +2 in February that compares to a +4 reading in December. The services sector slipped on the month to a reading of +9 from +10 in February; February was unchanged from January, but the March reading of +9 was up from a reading of +8 in December.

These comparisons show a very tight clustering of values over the last four months or so; the ranking of the overall European Monetary Union index is at its 46.6 percentile, ranked on data back to 1990.

The industrial sector has a ranking in its 70.5 percentile. Retailing is at its 78th percentile. Construction is at its 85.4 percentile. Services are at their 58.5 percentile. The clear weak reading for the Monetary Union is consumer confidence which has just an 8.6 percentile standing; it has been this weak or weaker only 8.6% of the time back to 1990.

As the data above suggest, there's not much of a rebound building while the various metrics show some improvement relative to their December levels (except for construction). The clear message is that there's not much change in momentum at all and as we can see the rankings on the various metrics remain moderate with construction fading but still having a strong activity score. Retailing is quite solid, and the industrial sector is still firm with its 70.5 percentile standing. The chart at the top shows that the various sectors are rebounding. The Monetary Union metrics are off their mini-cycle lows; however, this is somewhat curious with the European Central Bank raising interest rates with inflation high, a war still cooking in Europe and what could be a nascent banking crisis waiting in the wings. There's been some concern about the onset of recession, but these data instead show a clear persistence and slow slog recovery underway. This certainly raises questions about what's next.