Composite PMIs Mostly Improve in January

The composite PMI readings from S&P Global in January largely show improvements although clearly amid mixed performance. The trends are largely still weakening but January provides some pickup. The JP Morgan global PMI for example improved to 49.8 in January from 48.2 in December. The HSBC emerging market index has a PMI value of 51.9 in January compared to 50.1 in December. The developed markets index has a diffusion rate of 48.4 in January up from 47.1 in December. Despite these month-to-month increases, the global PMI index from JP Morgan shows deterioration from 12-months to six-months to three-months based on the PMI averages. The HSBC emerging market index deteriorates as well although with some mixed messaging. Emerging markets have a PMI average for 12-months at 50.2 that improves to 50.7 over six months and then falls back to 50.3 over three months. The developed markets index sequentially deteriorates from 50.7 to 47.9 to 47.6.

Queue standings are weak with few exceptions The standings of these various aggregated indexes are also weak. The JP Morgan global PMI has a 20% queue standing on data back to January 2019; on that same timeline the HSBC emerging market index has a 51-percentile standing, barely above its median, while developed markets have a puny 14.3 percentile standing, clearly well below the history median (which occurs in all cases at a queue standing below 50).

A breadth of monthly progress The unweighted average and overall median indexes across all the countries and the EMU show increases in January after posting increases in December as well. The number of jurisdictions with readings below 50 declines somewhat sharply in January to 11 from 17 in December compared to 17 in November. This is a count of 25 jurisdictions that includes all the elements in the table from the U.S. market composite down to Nigeria excluding the three market groups at the top of the table. Also, January finds five regions slowing compared to 10 in December 13 in November. Slowing refers to lower PMI values month-to-month. So, there has been some progress in the composites that's driven not just by large countries but by unweighted numbers.

Still…sequential weakness However, the 3-month, 6-month, and 12-month averages show ongoing weakness on that sequence for the averages and medians for this 25-country grouping. In addition, the number of jurisdictions with values below 50 increases from 7 over 12 months to 14 over 6 months to 16 over 3 months. But the number of jurisdictions showing slowing declines slightly from 18 over 12 months to 17 over 6 months and to 14 over 3 months.

PMI levels are uniformly weak with few exceptions There is little disagreement among the queue standings. The queue standings are weak, up and down the line. Among under 25 entries in the table, only 8 have queue standings above the 50th percentile, meaning that they are above their historic medians since January 2019. The strongest of them is Zambia with the 91.8 percentile standing (but…on a PMI value of only 50.6!). The next strongest is India at an 81.6 percentile standing, Hong Kong and Japan have standings in their 70th percentiles, Saudi Arabia, Kenya, and Italy have standings in their 60th percentiles. But the unweighted overall average standing in the table is at the 40.6 percentile mark with the median at the 36.7 percentile. These are weak readings.

Topsy-turvy world The global data have turned somewhat topsy-turvy, but the economy is showing some pick up with inflation still running very hot and central banks now having been on a path of hiking rates for about a year. These are somewhat unusual circumstances. It is unusual for economies to be strengthening a year after central banks began to raise rates especially when they raised rates aggressively which is the baseline that was established by the Federal Reserve in the United States and has been followed by many other central banks seeking to keep pace and to protect their currencies.

Have the ‘rules’ changed? However, I don't think this means we are in a period where economies are working differently as much as it means that we are in a period where monetary policy is paying a price for past neglect. It has long been pointed out that monetary policy works with ‘long and variable lags.’ What we see in this cycle is that while central banks have been raising rates for the better part of the year… prior to raising rates, monetary policies had been, for the most part, quite stimulative as inflation had gone up without central banks responding, causing real interest rates to be exceptionally low. In fact, in the United States, before the Fed began raising rates it had logged monthly the 13 most stimulative real Fed funds rates that the U.S. economy had seen since at least the mid-1960s and certainly longer. So, if there are lags from monetary policy, it's not surprising that the lags from that period of super-stimulus are still coursing through the economy pushing it ahead even as monetary policies tighten. And even now with central banks having raised rates, real rates generally are not yet restrictive. That is to say that the nominal fed funds rates are not yet above the inflation rates. However, this complicated picture includes also the fact that there has been a lot of stimulus of various sorts. In the U.S., money supply boomed at the strongest year-over-year rates it has seen since the 1960s, but now the same nominal money stock in U.S. is showing its first decline in over 40 years raising questions about what lies ahead.

Has ‘boom’ ever so quickly turned to ‘bust?’ Monetary policies have often gone through boom-and-bust cycles, but boom and bust cycles typically do not live next door to one another at the extremes that they do in this cycle. It's quite clear that the lags from the boom-cycle are beginning to trample on the lags from the bust-cycle and this is truly complicating the picture that we look at and making the job more difficult for central banks.

What comes next? The Federal Reserve, concerned about lags from its past policy tightening, has already slowed its rate hike policy and perhaps it is being swayed by the unusual decline in the money stock or just simply worried that it's raised rates so much and that monetary policy works with the lag. But it should be clear that if we evaluate monetary policy based upon the levels of real interest rates rather than on the changes in nominal fed funds rates these increases in the nominal funds rate are still part of a process that has kept monetary policy stimulative - a policy that is not yet restrictive. There is nothing restrictive for interest rate in play (yet) apart from its impact on the mortgage market where house prices grew so very high on the back of mortgage rates that were historically low. On the other hand, the collapse and ultimate contraction of money supply is a different reason to be concerned about what comes next.

Summing up With these observations, I urge people to please step outside your political affiliation, step outside whatever economic school of thought you belong to, and to look at the data and think about the complications that are in train in this unusual period. This is not a time to defend political sensibilities, ideologies, or biases. This is a difficult time, coming after a period in which I believe increasingly evidence is showing that we had a pandemic that was less damaging per se than the policy that was used to ‘save us’ from it. And now the legacy effects of excessive money growth and fiscal spending are going to come home to roost and they will have to be dealt with. There are clearly going to be political axes to grind, and this is going to complicate an evaluation of the way things are and what policy should do next. We need to play economic policy the way professionals play basketball; that means if you miss a shot you forget about it and you shoot the next good shot you get; if you have a turnover and lose the ball you don't hang your head, but you turn around and play defense and don't let your misplay cause and other misplay to occur. However, politics is not a game that's played this way. It's very clear that politicians have memories and vendettas and that past actions are going to affect future policy. It’s unfortunate way to conduct business as we try to come to grips with a changing and difficult period and try to evaluate a complex global economic situation.