Economy in Brief

The bellwether for Japan's Tankan report is the manufacturing sector for large enterprises. In the first quarter, the large firm index fell to a survey value of +1, down from +7 in the fourth quarter; the fourth quarter was slightly lower than the third quarter at +8, and the third quarter was slightly weaker than the second quarter at +9. In all, there are five quarters in a row in which the large enterprise manufacturing index weakens quarter-to-quarter. And there are six quarters since the Tankan for large manufacturing firms rose quarter-to-quarter (last done in Q3 2021).

However, the nonmanufacturing index in the first quarter improved, moving up to 20 from 19. That index had improved in the fourth quarter as well. The nonmanufacturing index has been rising for four quarters in a row. Manufacturing and nonmanufacturing have been going their separate and quite different ways for some time now.

At a +1 reading in Q1 2023, the manufacturing index for large enterprises is weak; it has a 26.7 percentile standing that compares to nonmanufacturing at +20 in Q1 2023, where the index has a 74.7 percentile standing.

Nonmanufacturing industries Among the nonmanufacturing sectors, the weakest standing is for restaurants & hotels with a 44th percentile standing, although that sector made a strong improvement in the fourth quarter, moving from a -28 reading to 0 and staying there in the first quarter of 2023. Transportation has a sub 50% ranking with the standing at the 48th percentile mark; transportation weakened sharply in the first quarter falling to a +10 from a +17 reading in the fourth quarter. The strongest nonmanufacturing industries from a ranking perspective are personal services with a 76-percentile standing, retailing with an 90.7 percentile standing and wholesaling with a 98.7 percentile standing.

Outlook survey The outlook survey for the second quarter sees manufacturing weaker at a reading of +3, down from +6 in the first quarter; the outlook has weakened for four quarters in a row. Nonmanufacturing has strengthened its outlook for Q2, rising to a reading of +15 from +11 in Q4 2022. The outlook for manufacturing has a 26.7 percentile standing while nonmanufacturing has a standing in its 74.7 percentile.

Since COVID The table also offers longer comparisons on changes in the Tankan reading from Q1 2020 before COVID struck. On this timeline, manufacturing has improved by 9 points and nonmanufacturing is better by 12 points. The outlook for the quarter ahead is stronger for manufacturing on that timeline by 14 points while the nonmanufacturing outlook is stronger by 16 points..

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.