China PMI Readings Are Mixed in October; The Message Is Not

Both manufacturing and services PMIs trend lower after a hiccup of growth China's manufacturing and services PMIs are split in October. Manufacturing is improving and services eroding. The movements on the month are small. The composite weakens on the month.

The table below shows slightly different trends from manufacturing and services, but both series are flat from 12-months to 6-months to 3-months based on their averages. And the bottom line is that the queue ranking of the two series puts both in their 14th percentile - quite weak overall.

Manufacturing strengthens a little bit over six months before weakening over three months where the index falls below its 12-month average. For services, the 12-month average at 49.1 gives way to a six-month average of 50.7, strengthening over six months, as the manufacturing index did. But then the services index strengthens again to gain over three months with the three-month average ticking up to 50.9 from 50.7, demonstrating sector expansion. The composite index moves up from 48.9 over 12 months to 50.2 over six months then falls back to 49.9 over three months, signaling overall economic contraction.

Manufacturing sector details retreat The detail for manufacturing shows broad declines in October across components compared to September levels. Stock levels for finished goods, input prices and stocks of inputs show increases in October. New orders for exports also get slightly stronger compared to September. All the remaining readings are weaker month-to-month. Among the 11 components in October, only one of them, input prices, has a diffusion value above 50, indicating that ‘expansion’ on most metrics is in retreat.

Sequential averages – mostly improving, still contracting More broadly the averages show over three months most of the components are improving compared to their six-month values but that only output shows outright expansion (PMI diffusion value over 50), the rest of the diffusion values are below 50. Delivery speeds and stocks of finished goods weakened further over three months compared to six months. Over six months, again, all metrics except output are shrinking with diffusion values below 50. Yet, all the averages improved compared to 12-months except for stocks of finished goods. Twelve-month averages show diffusion reading above 50 for output and for input prices- alone.

Setting aside the averages, we can also look at point-to-point changes over 12 months, six months, and three months; on this basis a bit more weakness crops up over three months. Five components show declines ranging from new orders, to output, to delivery speeds, to employment, to the stocks of major inputs.

Over six months only two components weaken: order backlogs and input prices. Over 12 months compared to 12-months ago, there are declines in four components: new orders decline, order backlogs decline, employment declines, and input prices make a substantial decline falling by 18.8 diffusion points.

The queue standings Despite the tendency among the diffusion gauges to be rising, when we look at their respective queue standings, they are uniformly weak. Among the eleven components (XI!) plus the headline, only one of these queue standings is above its median value (above 50) and that is for stock of finished goods at a 72.3 standing. And that is not necessarily good news. This measure tends to bloat when demand slows, and output is unable to slow as fast. The standing for the manufacturing PMI over this prolonged period is in its 8th queue percentile – it is this weak or weaker only 8% of the time. Orders are in their 4.7 percentile, output is in its 6.3 percentile, delivery speeds in their 3.1 percentile…and so on. There's a slew of extremely weak readings and nothing strong to offset them.

As we saw above, momentum is mixed and weak at best. And this is with the PMI current readings buried deep in the doldrums. China is not doing well, and the prognosis is not good either

The Future The combination of the manufacturing and services PMIs underscore ongoing weakness in China’s economy. After the sharp drop in the PMIs in the wake of the original Covid outbreak and a sharp recovery from it, China has seen economic conditions gradually deteriorate. Its property market problems and its zero Covid policies have made things much worse in recent months. Talk continues to swirl that China may be getting ready to drop/modify its zero Covid policy. We have heard this rumbling too much in the past to give it credence. XI has finished his party congress and is well ensconced in power. He is no longer at any risk from this policy and its lack of popularity. It seems unlikely that he would give up and admit defeat (show weakness) so soon after consolidating his power. I look for little change in China especially with its new-found focus on security instead of growth. What could be more secure than a policy of zero Covid? I rest my case and my argument in favor of continued stagnation.