Composite PMIs Step Back But Most Still Show Expansion

The S&P global composite PMIs took a turn for the worse in June. Among a sample of 20 countries and regions, only seven improved month-to-month. That means nearly twice as many deteriorated as improved. However, among the twenty, there was only one observation with the diffusion value below 50 indicating that there was actual economic contraction in June - that occurred in Ghana.

Growth rules but slowing encroaches That set of generalizations is true over all the timelines in the table where we look at the most recent three months and we look at a period of three months, one of six months and another of 12- months, in each case, compared to earlier periods to assess the changes and the levels of the various composite PMIs. Looking at these various slices of time, there is no period in which more than three composite PMIs are below 50 at the same time. So, 17 out of 20 of these jurisdictions have diffusion values above 50, demonstrating that growth prevails in every one of these timelines. However, of the six comparisons (three individual months and three periods), there are three comparisons of period changes that show that more than half or half of the jurisdictions are slowing; two other periods show a significant amount of slowing while only one period - that period is the comparison of 12-months to 12-months ago - in which only a few of the jurisdictions are weaker than they were in the previous period.

The clear overview for the composite PMIs is that growth remains the order of the day although there is some significant slowing. There's slowing in 13 of 20 areas in June, 11 slow in May and seven slow in April. The tendency to slowing has been expanding in the last three months. On the other hand, looking at the net changes over three months we find that 9 jurisdictions have slowed, slightly less than half, but over six months 12 have slowed.

The table also gives us averages and medians for the PMI measures in the table over the last three months; the average has fluctuated between 53 and 55 while the median has been between 52.7 and 55.8. For this group of 20 countries, these are moderate or normal composite PMIs. Over three months, six months and 12 months, the averages fluctuate between 53.7 and 54.4 with the median fluctuating between 53.8 and 54.9, looking at the same sort of range.

High-low percentile standings The average percentile standing in June for the various countries is a 79.9 percentile standing while the median is at 81.5. These percentile standings place the current PMI value for each country or region in a percentile positioning in its high-to-low range of values since January 2018. So that on this period we see that when placed within the range of recent values current performance is relatively closer to the top of the range than to the bottom. However, the second ranking statistic, and the one I prefer, is the queue standing.

Queue percentile standings The queue standing places the current observation expressed as a percentile standing among all observations from January 2018 to date – not just positioning it between the highest and lowest. It is an ordinal measure which is what the headline ‘queue’ stands for; it tells you whether the current value is at the head of the queue or at the end of the queue or near the middle. For both the average and the median we see very middle of the road queue percentile standings. The average is at its 50.2 percentile while the median is at its 52.8 percentile. These queue standings (or ranking statistics) position the current crop of PMI readings near the middle of the distribution they had occupied during this period. That assessment abstracts from the particular level reading is this month. It is the ranking that places the current observation as a position and its queue of historic data and focuses our attention on its relative position rather than on the absolute value of diffusion itself. That gives the reading much more context.

When we put these various findings together, what we see is that we have a group of twenty countries whose current performance is what it has been on average since early-2018. We see that recently there has been some tendency for the composite PMIs to register slower growth. And not surprisingly giving these middle sorts of ranking assessments, there are very few members of this group that show contracting growth. In fact, over the various time segments, we look at here there have been very few that have shown contraction. Still, there are seven jurisdictions with queue standings below – and in some cases well below - their respective historic medians. The U.S. and Germany are among countries with PMI queue standings in the lower one-quarter of their queue of observations since January 2018 - that is not reassuring.

The locomotive slows We know that global growth is being challenged. We know that the United States has posted a negative GDP number for the first quarter of 2022, and we know that U.S. growth is coming up weak in the second quarter of 2022 as well. There is a lot of talk and concern about the prospect for recession although it's true that despite some weak U.S. growth numbers there's very little from U.S. statistics that really causes the economy now to appear as though it's in recession. This is one period in which the negative GDP performance doesn't really seem to characterize how the economy is doing overall and that's an important point to keep in mind.

The global situation Nonetheless, the Federal Reserve, the ECB, and the Bank of England are raising interest rates because inflation in their respective jurisdictions as well as around the world has been higher than bankers are comfortable with. There is a new resolution to make sure that inflation is kept within the bounds of the target for inflation that central bankers have sought and achieved over the last several decades. This process is being complicated by there having been a worldwide virus that disrupted supply chains and is partly responsible for the inflation. The policy responses to the virus outbreak that injected liquidity and may have stimulated economies too much are also a factor. Central banks are busy trying to pull this liquidity back and to lean against some of the fiscal stimulus that had been adopted as well as to deal with new challenges from supply chains including those that stem from the war in Ukraine with Russia.

Challenges ahead The bottom line for this report is not particularly good news or bad news. Growth clearly dominates the report, but weakness is encroaching while central banks are raising rates, an action that will contribute to further weakness ahead. Meanwhile, the geopolitical problems stemming from the Ukraine-Russia war and concerns about China's saber rattling in the Pacific provide additional complications that policymakers will have to be aware of. In addition to all that, the virus has not gone away. It still circulates. It is much less challenging than it was feared to be in its early phases, but it still circulates, and it could become an issue once again at some point down the road. Policymakers will have to keep their heads on a swivel.