Economy in Brief: July 2023

China's manufacturing sector improved slightly on the month with its PMI reading moving up to 49.3 from 49.0 in June. The reading is still below 50 so it continues to indicate contraction, but there is less contraction than there was a month ago. China has four straight months of manufacturing readings below the level of 50.

The manufacturing PMI reports 11 components, four of which decline month-to-month in July; they are output, employment, new export orders, and imports. Among the 11 component readings, eight of them have individual sector diffusion readings below 50, indicating contraction for that metric.

In June, 8 of 11 components weakened month-to-month with only two component readings having PMI standings above their 50th percentile; the two that scored the highest were delivery speeds and the output, although they were both very mildly above 50 at readings of 50.3 for output and 50.4 for delivery times.

May saw weakening across 10 of 11 components with only delivery times strengthening month-to-month; only delivery times have a reading above its 50th percentile.

Manufacturing readings in China continue to display levels of activity that hover about the unchanged level. March saw a bit of a rebound in the index, but it subsequently lost that bloom and has been below 50 for most of the recent months. In fact, in the 16 most recent months, the Chinese manufacturing PMI is below the diffusion reading of 50 in eleven of those months. During that stretch, two of its ‘above 50’ readings are at 50.1 and another is at 50.2. Clearly the last year and a half has been a weak year for Chinese manufacturing.

Average data show 3-month readings below the breakeven 50-diffusion mark in 9 of 11 areas. Over 6 months, 7 readings are below the diffusion value of 50, while over 12 months, all the sector readings except the one for output average below 50. These statistics confirm a great deal of subpar performance in Chinese manufacturing recently.

The queue percentile standings for the Chinese data from July 2023 back to 2005 show the PMI headline and all the sectors with standings below their 50th percentile except for only two sectors: delivery times and stocks of major inputs. For the rest, the fact that readings are below the 50th percentile mark means that they are below their medians for the period. Delivery times have a 67.7 percentile standing which put them barely into the top one-third of its historic readings, while stocks of major inputs have a 58.5 percentile standing, above its historic median.

The manufacturing PMI itself stands in its lower 10-percentile, which is extremely weak; new orders run low, in their 12th-percentile, output is in its lower 10-percentile, and new export orders in their lower 7th percentile. Imports are in their lower 12th percentile and so on. The percentile standings are extremely low and reinforced the signal that not only are diffusion values showing significant weakness across components as well as contraction, but the level of activity indicated by these sector readings compared to what they show historically are extremely weak readings.

The European Commission reading for overall sentiment in July slipped again to 94.5 from 95.3 in June, continuing a 3-month rundown in the overall assessment of sentiment for the Monetary Union.

July saw slippage in the industrial measure that fell to -9 from -7 in June, continuing a string of ongoing declines in that sector. Construction also fell to -3 from -2 in June, continuing a series of slides for that sector. The services sector was unchanged at a reading of +6 that it had fallen to in June from a value of +7 in May - this continues a series of low or slipping readings for the services sector. Month-to-month retailing improved slightly, rising to a -5 reading from -6 in June, bringing it back to its May level of -5. Consumer confidence also improved to -15.1 from -16.1 in June; there is a series of small improvements there as well in eight of the last nine months.

On balance, sentiment is slipping; however, there are several key sectors that are showing some signs of stability, recovery, or less slippage overall.

Slippage across countries Looking at the big four economies, there was slippage in Germany and France in July while Italy and Spain showed improvements. In June, there were declines in the big four economies, except for France and the same is true in May, when there were declines in the big four economies excepting France. But declines are posted by the large economies and in all cases where declines are present, they represent drops of 1% or more. In July, both Italy and Spain improve; Spain's improvement is a substantial improvement of 1.3% as Italy ticked higher by only 0.1%. Weakness dominates the large economies, but it has some notable exceptions.

Looking across the whole of the Monetary Union, 18 of 19 members report. In July, 7 members show declines in sentiment; this compares to 13 members showing declines in June, and 14 members showing declines in May. But as we demonstrate above, the largest economies are still showing declines. Germany, the largest EMU economy, logs month-to-month to decline on all three-months. France shows a month-to-month decline only in July, while Italy and Spain show declines in June and May but then rebound in July.

Sector standings The percentile standings by sector show two sectors, retailing and construction, with performance above their historic medians on data since about 1990. However, the overall index has a standing near its lower quartile at a 27.7 percentile standing; the industrial sector has a lower 30th percentile standing, consumer confidence has lower 20th percentile standing while the services sector has a 43-percentile standing.

Standings by country The standing data by countries show that among the eighteen countries, only four have readings that are above their historic medians. Those four are Cyprus with a 62.7 percentile standing, Malta at a 79th percentile standing, Greece with an 89-percentile standing, and Italy with the 57-percentile standing. For the remaining countries, the standings are much lower with the highest country percentile standings being Spain at a 44-percentile standing and Portugal at about a 40-percentile standing. Only Luxembourg (3.3%) and Estonia (5.7%) log single-digit standings. There are a number of countries that have standings between the 10th and 20th percentiles including Austria, Belgium, Finland, the Netherlands, Slovenia, and Slovakia… as well as Germany. Nine countries stand in the lower one-fifth of their historic queue of data compared to only one in the top one fifth of its historic queue.