PMIs Weaken Broadly, Batten Down the Hatches

You don't have to put too fine a point on it this month to see the trend. The flash PMI readings show weakening across all the countries and all the categories for which we have flash readings in the table for July. There's growing weakness in the EMU, Germany, France, the United Kingdom, Japan, and the United States. There is growing weakness in manufacturing and services everywhere in July – except for manufacturing in the U.K. No judgement is required here.

In June, the readings were similarly weak but not as unequivocally weak. In June, the U.K. had a stronger services sector and a stronger headline (composite) while Japan also had a stronger services sector and a stronger headline with all other countries and sectors finding weakening month-to-month. May found only one composite index getting stronger that was Japan on the strength of a better services sector while there was also strengthening for manufacturing in Germany that was not enough to support the composite.

We also look at trends with three-, six-, and 12-month averages. These averages in the table are lagged by one month; they're only constructed over final data not over the preliminary or flash data. On this basis, a little bit more strength appears in the numbers and particularly a surprising result over three months compared to the three months that appear individually in the table; but then for the moving averages of three-, six-, and 12-months we are not including the month of July. However, at the far right of the table the change calculations are done on up-to-date data, including the flash readings, and there you see more widespread deterioration particularly over three months.

Even so, it's clear from the sequential averages that there is weakening in progress. And it's clear from the change data on the far right that over three months the weakening is in fact quite broad based and rather severe.

We can also try to get more of a sense of what things are like in absolute terms by looking at the queue standing or ranking data. As of July, only three readings in the table stand above their medians calculated back to January 2018. Those exceptions are the services sector in the U.K., the services sector in Japan, and Japan's composite; the latter barely beats the 50% mark at 50.9%. The United States this month comes in with the weakest data in the table with a composite reading in its lower 5.5 percentile based on a services sector that is in its lower 5.5 percentile as well. The EMU index challenges U.S. weakness with the ranking at its lower 14.5 percentile that comes about not because of extreme weakness in one sector but because of paired weakness in manufacturing and services with standings in roughly the 30th to 23rd percentiles of their respective rankings. This weakness occurs because of the weight of Germany in the EMU. Germany has an overall ranking in the 7.3 percentile, close to the U.S. and gets there the same way the EMU does, with paired weakness in manufacturing and services with rankings in the 20th the 30th percentiles, in rough terms.

The United States, the European Monetary Union, Germany, and France all have composite readings that are below the readings from January 2020 before COVID struck. This is not a good development.

On balance, we see a great deal of weakness; we see weakness encroaching. We see it intensifying and we know the underlying economic trends are going to continue to reinforce movement in that direction. We have seen real-time economic data getting weaker and we are observing central banks raising interest rates to combat intolerable rates of inflation on what is mostly a worldwide basis. The European Central Bank just started raising its rates this week and did so with a hike that was larger than expected. The U.S. Federal Reserve has stepped up its pace of hiking and looks like it's shooting at a higher profile for rates than it was earlier in the year. That's not surprising because inflation has been coming in worse than expected... everywhere.

All the risk-factors that have been in play, remain in play. (1) Inflation is high and central banks are tightening. (2) COVID continues to circulate, and we could see an intensified set of worries now that U.S. President Joe Biden - despite all the efforts that are made around him (fully vaccinated and double boosted)- has contracted COVID-19. I fear that this will put off the day when people learn that vaccination and boosters do not confer immunity. (3) The war in Ukraine continues unabated. (4) China continues to pursue its zero COVID policy and yet COVID continues to spread causing China to continue to lock down portions of its economy.

China's push against real estate development has created a political backlash that it will have to deal with. And in the U.S., despite an ambitious rate hike profile from the Federal Reserve, the current increase in rates has increased mortgage rates very sharply and is already decimating the housing industry in the United States spreading economic weakness sooner than expected there.

There was already a negative GDP result for the first quarter in the U.S. and in the second quarter a lot of growth statistics are coming in weak that point to the potential for another negative GDP result. There's a lot of talk in the U.S. about recession- about a recession coming; some people insisting that the U.S. is already in recession. There are concerns about Europe and the ECB is moving slowly partly because of Europe's vulnerability to energy. Whether or not that card gets played is not up to Europe; it's up to Vladimir Putin. All in all, the risk profile for policy remains quite high. The future is becoming more certain as one that will contain more risk and more downside.