Manufacturing PMIs for October Worsen As Central Bankers Face a Dilemma

In October, the manufacturing readings worsen in 16 of the 18 reporting countries/regions. However, of 18 countries and regions reporting in the table, only eight show manufacturing PMI values above 50 indicating that their respective manufacturing sectors are still expanding.

The countries that show manufacturing expanding in October according to the S&P manufacturing PMIs are India, the United States, Brazil, Indonesia, Vietnam, Japan, Russia, and Mexico. Taiwan has the weakest manufacturing reading in the table in October at 41.5, Germany’s reading is 45.7, Turkey registers 46.4, and the European Monetary Union comes in at 46.6. Those best-worst comparisons show the economic performances mixed between the largest and the smallest economies as of October; however, nothing is particularly strong. The strongest reading in the table is India at 55.3 and after that Indonesia at 51.8. These are not impressive numbers.

The sequential comparisons show that over three months there are only three countries that are improved over three months compared to their six-month averages; over six months there are only four countries that are improved compared to their 12-month averages; over 12 months there are seven countries that are improved compared to their 12-month averages from 12-months ago. The breadth of improvement is on the decline from 12 months to six-months to three-months that's clear. Over three months the countries that report improvement are Russia, India, and Indonesia. Over six months the countries that report improvement are Mexico, Russia, India, and Brazil. Over 12 months the countries that register improvement are Japan, China, Russia, India, Indonesia, Malaysia, and Vietnam. Given the sanctions imposed on Russia, and other anecdotal evidence, the Russian PMI reports for manufacturing are suspect….

The percentile standing data on the far right of the table show that there are only three countries that have readings this month that are above their historic medians calculated over the last 4 ½ years; those three countries are Mexico, Russia, and Indonesia. Taiwan is showing the weakest reading of this period. France’s reading is a bottom 6% and it is joined by Canada, the U.K., the U.S., and the euro area as countries or economic units that have standings in the lower 10 percentile of their historic ranges. The median standing for the full queue rankings in October is a 20.8 percentile standing, an extremely weak figure for the median.

Distribution worsens in October The table below chronicles the distribution of standings across various PMI groupings for the countries in the top table. The proportion of the readings between 50 to 55, which is essentially the normal range, has been around its 40th percentile in September and August. In October that fell to the 38.9 percentile with an unchanged proportion of about 5 ½% in the cohort above and with the cohort below (50 to 40) containing 55.6% of the members, up from 50% in the previous two months. September and August brought the same distribution of readings to the survey while in October conditions have stepped down considerably.

Sequential deterioration The sequence from 12-months to six-months to three-months shows deterioration, but it has not been a steady deterioration. The percentage of reporters in the 50 to 55 percentile cohort is about 52% over 12-months rising to 56.5% over six months then falling sharply to about 43% over three months. In addition to that, over three months the proportion of reporters in the 40 to 50 lower cohort rises to 51.9% from 38% over six months and 27.3% over 12 months. And the percent of reporters that are in the higher cohort from 55 to 60 declines from about 21% over 12 months to 5.6% over six months and three months.

These data and trends sketch a deteriorating pattern as well as extremely weak readings in October. The global economy continues to be challenged and the challenges continues to be severe because while the economies are slowing down inflation has not showed much sign of slowing down. There have been some hints of slowing, there has been some decline in oil and commodity prices, but the broad inflation measures that central banks target have continued to be sticky or even to accelerate. This is not good news. At the same time, the war news in Ukraine is bad as Russia has ended its support for grain shipments.

China China continues to pursue its COVID lockdowns and has moved into this next five-year program. After it's Congress with the Prime Minister Xi in firm control, and with many in China concerned about a rising degree of authoritarianism there. China, faced with growth challenges, has declined to meet them and instead chosen to focus on ‘security’ and let growth tail – as it would have occurred anyway given a new-found focus on less openness and more authoritarianism. The potential conflicts between China over trade and geopolitics seem to have mushroomed.

Global conditions Conditions globally are challenging in many ways: climate issues are a problem, there are political issues in a number of places with the United States facing midterm elections in one week. Geopolitical tensions run high. Economic conditions are weakening, and inflation is too high and stubborn; the only solutions for the problems being faced by the world economy are solutions that will solve one set of problems and make another set worse. But that is classically how monetary policy works. To reduce inflation, central banks need to reduce aggregate demand. The reduction in aggregate demand increases unemployment. This is what we face: the main uncertainty is about how quickly inflation will recede and how aggressively central banks will combat it. Then the question is, will they succeed in getting inflation back down to target? Or will they stop early to spare growth and leave us with a higher residual inflation rate in the aftermath of what will certainly be a global slowdown and in an all-likelihood recession. All that coming soon to an economy near you…