Flash PMIs Reconfirm Return of the Downtrend; Still No ‘Final Word’ on Inflation...

Flash S&P PMI survey data for July show broad weakening across the large industrial countries that are early reporters to this survey. Germany and France show month-to-month weakness in their composite indexes as well as both components; this weakness is echoed by the European Monetary Union aggregate that weakens in its composite as well as in its two components. The U.K. shows a weaker composite and weakness in its two components; Japan shows an unchanged composite with slightly weaker components. The U.S. shows a weaker composite with weaker services reading juxtaposed with a stronger (but still contracting) manufacturing reading.

Return of the downtrend The chart at the top shows that revival had been in play for the services sector but now that is in the past; services, clearly, for several months, have returned to a downtrend. Manufacturing remains on a steady, slow, but clearly deteriorating path. At the end of 2022, manufacturing went through a brief episode when declines abated; the index stabilized. But it's now clearly back on the move and in the ‘weakening’ category.

Sequential patterns in data The sequential patterns in the data in recent months show a clear tendency to weaken in the month-to-month changes across all the sectors in all the countries among the early reporters. There are six countries and three readings for each. Among the 18 readings, in May seven show period-to-period strength, in June only one reading shows strengthening, in July only manufacturing in the U.S. strengthened while in Japan the composite was unchanged. The encroachment of weakening conditions is clear.

The ebb and flow; flows then ebbs Over broader 12-month to 6-month to 3-month horizons, the opposite trend to strengthening conditions is still more common. These calculations are from averages on only finalized data, meaning the data are up-to-date though June. Of 18 readings, 12 show strengthening over three months, 13 show strengthening over six months and only 2 show strengthening over 12 months compared to 12-months ago. The table most clearly shows a transition for trends is progress. From 12-month to 6-month and 3-month, a rebound is in progress through June data. That is turning to decay in the more up-to-date monthly data. These trends correspond well to the various reports we have seen that have shown resiliency in economies despite central banks globally hiking interest rates.

Opinions vs. facts Whatever your mindset, still worried about recession, thinking central banks have done too much, or not enough, the data show a weakening in progress following unexpected strengthening. The queue standings that rank the PMI diffusion levels over a span since January 2019, shows all readings are below their respective medians on this timeline except Japan, where the composite and service sector readings are still relatively strong.

Rankings mostly range from weak to much weaker The average composite ranking in the table is 32.1%. The average manufacturing ranking is 8.4% and the average services sector ranking is 41.8% (all below 50%; all below their respective medians). The EU and Germany are logging their weakest manufacturing readings of the period while the French and U.K. manufacturing sectors log lower 2-percentile standings. Manufacturing is clearly and broadly exceptionally weak. Services rankings range from an unusually strong 86-percentile in Japan to the 35th percentile in the EMU and in the U.S. Yet, only the services sector in France has a raw diffusion value below 50, indicating sector contraction. And France has been buffeted by a series of labor and political actions that have interrupted activity.

Summing up Central banks have engineered a period of weakness but one with a mild downward gradient and with a still-growing - and for the most part- still-vibrant labor market. The question now is whether this slowing is/will be enough to tame inflation or whether inflation reduction and containment require more of a jolt. Economists are arguing about this; politicians are adamant! Inflation has begun to recede from its heights; but everywhere the reduction in core inflation has been much slower and the core pace remains well above the targeted-pace. This keeps the jury still OUT on this issue of what is enough. And that determination remains an especially important issue for policy. The policy wonks are at odds over it, as are economists and especially politicians, with ‘skin-in-the-game and elections approaching.