Flash PMIs by Sector and Overall Slip Broadly

PMI data for October are weak on a broad front, falling for all composites in the table except for Japan and falling in all these sectors except for manufacturing in the U.K. and for services in Japan. In September, the U.S. is the exception with stronger readings for the composite, manufacturing, and services. Japan has a stronger composite and services reading in September as does France, but the United Kingdom, Germany, and the European Monetary Union all show weaker readings for all three components. In August, there are weaker readings for all the composites and most of the components with the exceptions only for manufacturing in France and manufacturing in the U.K. that both were stronger in August compared to July. The picture that emerges from this is widespread weakening.

Three-month, six-month, and twelve-month data in the table I bet it's turn hard data they exclude the October reading which is a flash reading. Based on these averages, all the three-month readings are weaker than all the six-month readings. The six-month readings are weaker than all the 12-month readings except in Japan where both services and the composite are stronger. Over 12 months, there's more variability with 10 of the 18 readings stronger on the month.

High-low standings The percentile standing which positioned the month’s reading relative to the high-low readings since January 2018 show relatively moderate and positive standings. The U.S. is the exception with a 48.6 percentile standing. Japan logs a 94th percentile standing; France logs an 80th percentile standing; the European Monetary Union logs a 71.4 percentile standing. However, these are the current index paced in a range relative to the highest and the lowest readings during this period. It's a much more powerful reading to look at the ranking of the current month among all the readings since January 2018.

Queue standings The queue standings rank the current month among all the readings since January 2018 and here the rankings changed remarkably. Japan has the highest composite standing at its 72nd percentile. After the Japan reading, it drops all the way down to a 27.6 percentile standing in France and from that we're down to a 6.9% standing in the European Monetary Union, in the U.K., and in the U.S. There's clearly a proliferation of weakness. 11 of 18 queue percentile standings reside below the 15th percentile mark.

The net drops in PMIs In October, the unweighted change among this group of countries and the EMU is for the composite to fall by 1.2 points, for manufacturing to fall by 0.9 points, and for the services reading to fall by 1.1 points. Over three months, the average drop is 1.9 points for the composite, 3.1 points for manufacturing and 1.9 points for services. Over 12 months, the average drop is 6.5 points for the composite, 8.9 points for manufacturing and 6.6 points for the composite.

Comparisons to pre-COVID levels Compared to just before COVID struck, in January 2020, there are only four readings in the table that are above that January 2020 level. They are all the readings for Japan and the manufacturing reading for Germany – the German reading is higher by only 0.4 points. On average, since January 2020, the composites are weaker by 3.6 points, manufacturing is weaker by 1.4 points, and services are weaker about 4.0 points. The boom-bust cycle related to COVID has now left us at a net weaker level. Not only are the PMI readings weaker but they're decaying; they have more negative momentum.

Inflation still being fought…with poor results Central banks are still raising interest rates. Inflation rates are still high. Growth continues to be weak and spotty. The international focus remains on the Federal Reserve that is raising rates at a rapid pace but continues to log an official fed funds rate level that is significantly below the 12-month inflation rate. The irony here is that while the Fed is just about setting records in terms of the pace of raising interest rates, it is also sending the opposite record for having the federal funds rate below the inflation rate this far into a tightening cycle. In other words, the Fed delayed raising rates for so long and the inflation rate rose so rapidly without any that response that the Fed’s near record pace of rate hikes has still left the Fed behind the 8 ball at an opposite record level.

Look at the facts right-side up, not upside-down That should explain a lot of the discussion and disagreement in markets about what's happening and what the Fed is doing and what the result is. For example, it should not be surprising that after raising rates this much the inflation rate is not lower, and the economy hasn't slowed, and the unemployment rate continues to fall. With the federal funds rate below the inflation rate, monetary policy is stimulative. The Fed has raised the funds rate by 300 basis points and yet monetary policy is still stimulative on balance. If monetary policy is stimulative - even if it's less stimulative than it was - you wouldn't really expect the economy to slow. And the economy has not slowed although Federal Reserve officials continue to register some degree of surprise that inflation continues high and that there's been such minor impact on the economy. I don't see why they would have expected anything else.

The exception sector is not exceptional The one sector that produces a different view is housing. There, because mortgage rates had gotten to be so low, the Fed tightening brought mortgage rates up sharply higher. Rising rates coupled with with extremely high home prices have proved to be a potent elixir knocking the props out from underneath the housing market. This is one sector where there appears to be no lags whatsoever in monetary policy. In fact, even before the Fed started tightening, markets had started to see the inflation and mortgage rates had begun to drift higher.

International dimensions of U.S. policy And because the dollar is still the reserve unit and because the dollar is an important transactions currency these interest rates in the U.S. are pushing the dollar up and even though oil prices have moderated countries are finding their oil bills are not going down because oil is priced in dollars, and they have to pay more for dollars in order to buy their oil. So, there are clear negative repercussions for the rest of the world from U.S. monetary policy. Just because the U.S. is seeing commodity prices through the lens of a dollar-based economy and we see commodity prices abating, does not mean the rest of the world is seeing the same thing happen since they must translate their currency into dollars and then buy their commodities. Right now, that's not working very well for them.

The right issues/the wrong discussions There are ongoing discussions and disagreements about what Fed policy is going to have to do and how long it's going to take to knock this inflation rate down. The IMF and the World Economic Outlook has endorsed central banks fighting inflation, but the World Economic Outlook has also warned that it could take a long time for inflation to moderate and we may be stuck with elevated interest rates for a period up to two to four years. Time will tell us if that is a realistic assessment or not. I think it's not. My view is that the pessimistic assessment of the impact of raising rates on inflation comes from the early to the mid-1960s through the mid-1980s when inflation was allowed to run loose and had run loose for a prolonged period. However, if we look at the behavior of inflation in each business cycle since the recessions in the 1980s, we find that when inflation rose in a recession it didn't rise that much and it went down quickly in the recovery. Inflation is only sticky stubborn and hard to get rid of when allowed to stay around for a long time. To me, the lesson is extremely clear. It's important for central banks to get control of this inflation rate and to do it now and to be aggressive; otherwise we could be looking at years of problems. The problem is not the impotency of monetary policy or long and variable lags. The problem is the lack of resolve by central bankers. Either they have the resolve to get rid of inflation or they don't. And if they don't, they can put in place a legacy of inflation that will be fought by subsequent central bankers for decades. That's the message from the 1960s seventies and 80s; let's hope we've learned it.