S&P Composite PMIs Continue to Erode

S&P composite PMIs for November worsened generally across the reporting global community. Among the 23 reporters in the table, we see in November 15 of them have PMI gauges below 50 indicating a contraction in the overall economy (since these are composite indexes) while 12 of 23 indicate that there is a slowdown in progress. Ten of the 15 PMIs below 50 are also slowing.

The November metrics are generally slightly worse than those from October and September indicating that there is some ongoing slippage occurring. In addition, if we look at the averages from 3-, 6-, and 12-months, we see the number of jurisdictions with readings below 50 swells in number from 4 to 7 to 13 while the number that are showing slowing activity rises from 3 to 16 to 18. There clearly is a broadening of the weakening and that is worrisome.

We also see a great deal of weakness among the largest market economies at the top of the table over the last three months. Looking at the United States, the European Monetary Union, Germany, France, Italy, and Spain as separate entities, these are six observations over three months giving us 18 observations and yet among those 18 only 6 of the observations showed month-to-month improvements. Looking at the same group of countries over three months, six months and 12 months, all of them are worsening on all of those horizons.

Looking a little bit more deeply at the queue standings that rank each one of these observations and their recent approximately 4 1/2 years of queue of data, we find that for the U.S., for the European Monetary Union, Germany, France, Italy, and Spain all of them have queue standings below the 25th percentile, most of them below their 20th percentile. These are all extremely weak readings.

The extent and degree of weakness The queue versus percentile standings generally shows very different results. The percentile standings position each observation in its high-low range as a percentile position for the period while the queue metric positions each observation relative to all the observations. When you look at the queue standing, you see where this observation stands in percentile terms versus all the observations that have been registered during the last 4 1/2 years. The queue gauge only gives us the relative position proportionally versus all the other observations. The percentile gauge, in contrast, uses only three observations. The difference is that the percentile numbers show us that there is very little abject weakness in the November readings. Placing each November observation between its respective highs and their lows leaves most of them above their 50th percentile that is above their mid-range observation. Only Qatar at a 39.5 percentile standing, Sweden with a 44.1 percentile spending and the U.S. with a 46.4 percentile standing are below their respective historic medians. The weak queue standings tell us that the preponderance of readings over this period have been stronger, but the relatively firm percentile standings tell us that current levels of the variables do not threaten the sort of lows we see during periods of extreme weakness such as during Covid since those readings fall in this period comparison and mark out of the lows.

Current standings: As an example, the average unweighted U.S., U.K., European Monetary Union, Japan composite PMI is at 47.8 in November; that's down from 48.8 in October and from 49.4 in September. This is clearly slipping weakness, and these are observations below 50 indicating contraction, at least in the lexicon of the PMI data; however, these are not exceptionally weak readings. The median for the entire sample of countries is at 48.9 in November, down from 49.4 in October and from 50.9 in September. There is sliding weakness considering the entire sample. And as we saw, the number of jurisdictions below 50 has been expanding and the numbers slowing have been relatively steady and in double digits. A good deal of weakness is pervasive but so far it is weakness of a more moderate variety with the overall average and median percentile standings around their 70% mark.

Central banks, inflation, and their inflation targets Inflation continues to run hot globally, and central banks continue to lift rates. All the evidence on the PMI front is that economies are continuing to erode under this pressure. While there was some evidence that inflation is dissipating, the pace of dissipation is extremely slow and would not seem to be enough to divert the central banks from their tightening tracks. Part of that is because inflation is already so far over the targets that central banks have chosen. Inflation really needs to decelerate quite sharply to convincingly send the signal that it's going back down into the target range to which central banks had previously committed.

Are central banks determined or resigned? If central banks begin to prevaricate and to slow their tightening with inflation still so high and barely withering, it will be a clear signal that they are resigned to seeing relatively high inflation stay with us for some time. If central banks do not have the commitment to push the inflation rate backward, it will linger. This tactic should be associated with any central bank claiming to be shooting for a soft landing. Soft landings are not able to be achieved if central banks are determined to push inflation down sharply. The central bank that is going to be copacetic with the notion that it has stopped inflation from rising and has a gradual downward path that will eventually get back to 2% is the central bank that's willing to tolerate inflation that's too high for too long and will risk inflation becoming entrenched in that country. When we listen to central bankers talk, these are the things that we should look for. Inflation generally doesn't flare as sharply as this and then, all on its own, put its tail between its legs and go home and return to the 2% mark. That's not a realistic expectation. But it seems to be an expectation in some central banks that still cultivate or express that as a desire to deflect criticism that they are not aggressive inflation fighters. Why be aggressive if inflation will recede on its own? Why? Because it won't ever really do that.