Manufacturing PMIs Cluster in the 'Sweet Spot' But Are Losing Momentum

In May, most of the manufacturing PMI indicators in the table for a sample group of 15 countries showed some backing-off from April levels. Nine of the 15 entries in the table are weaker in May, the same number is in April and those totals compare to 11 weaker in March. The graph for select countries shows a gradual reduction in the S&P global manufacturing PMI indexes overtime for the United States, China, and the EMU.

Looking at the sequential metrics, the averages over 12 months, six months and three months reveal that over 12 months seven of the entries show worsening conditions while eight saw improving conditions. Comparing six-months to 12-months, there are four entries showing improving conditions with 11 showing worsening conditions. Comparing three-months to six-months, there's an overwhelming worsening with only three entries showing month-to-month improvement; those are for the U.S., Canada, and Brazil.

We can also look at PMI rankings for the full data period; two of them are suggested in the table, one is the high/low percentile ranking that positions the current observation between the highest and the lowest values in the sample (back to January 2018). While that metric can be useful, it is a metric that is derived from only three observations. I prefer the other measure, the queue rankings, which position the current observation in the full sample of data available expressing the result again as a percentile standing (Rank % or Queue %). Viewed in this way, only Vietnam has a top ten percentile standing with a 90.6 percentile metric in May while Turkey, China, Taiwan, and Germany have percentile metrics that rank below 50% putting them below their respective medians for the period. Still, Germany is close to its median. Turkey is somewhat farther below its median and Taiwan is weaker still, but China has the lowest relative reading in the table with a 5.7 percentile standing – a standing that has been lower since January 2018 less than 6% of the time.

The far-right hand column measures the total gain in the current manufacturing index compared to February 2020 before the virus struck. Only Turkey has yet to get back to that level although India and Taiwan have barely gotten back to those respective marks. Manufacturing sector recovery under COVID has been the most successful for China and Germany, followed by the U.S.

Table 2 summarizes these 15 observations by giving us some sense of the distribution of values for the respondents. In May, fully two-thirds of the entries lie within the 50 to 55 diffusion reading cohort that best represents normal growth. In May, 13.3% of the observations lie in the 55 to 60 cohort which represents moderate strength while 20% of the observations lie in the 40 to 50 cohort which represents moderate weakness. There are no observations in the other extreme categories for this period.

The table offers three-month, six-month and 12-month averages as well as some averages over the previous twelve months, the 12 months before that, and a full four-year timeframe. Compared to all those periods, this month of May has the highest concentration observations in the normal growth zone of 50 to 55. The proportion of below average observations at 20% it is close to what it has been over the last three-, six-, and 12-months and lower than it had been in periods previous to that. The proportion of observations in the moderate strength zone of 55 to 60 at 13.3% is moderately lower than it's been over three months, six months, and 12 months as well as the 12-months before that.

On balance, the current PMI metrics are quite good and quite normal. The month’s results are encouraging except for the loss of momentum that is evident from both the graphic and from the sequential proportions that measure the tendency of reporting countries to report stronger or weaker signals.

Summing up We continue to write about how these are challenging times: inflation is high and fresh data from the European Monetary Union shows that inflation there is every bit as bad as it is in the United States although the European Central Bank is even farther behind the Federal Reserve in addressing that fact. Even in Japan, inflation has ticked up over the 2% mark. Inflation in the U.K. is also extremely high and being fought by the Bank of England. Oil prices are rising again. China’s lockdown in Shanghai being relieved. There is some anticipation of more global growth because of that and some pressure on oil prices as a result. The war in Ukraine continues to pose inflation risks as well as to threaten food shortages for the global economy. Risks continue to abound.

Central banks clearly need to raise rates to push inflation back into its target zones. The outlook is for growth to get weaker rather than stronger as central banks hike rates. Central banks keep trying to put a brave face on prospects, but it's frankly hard to look at the facts, at the realities, at the trends, and to think that the central banks have the acumen of Houdini and can escape this situation without creating recession. They keep trying to convince us, but I'm not a believer. If somehow bankers can solve this inflation problem without creating recessions, it will be the first time in at least the Post War period that anything close to this has been achieved. That's why this policy objective is out of reach: its objective lies at the extreme of a probability distribution that is mostly aspirational.

Commentaries are the opinions of the author and do not reflect the views of Haver Analytics.