S&P Manufacturing PMIs Show Better Breadth But Ongoing Weakness

Manufacturing PMIs in January show continued weakness; the median for the 18 countries and the table weakens slightly in January compared to December and remains weaker than the November median as well. Diffusion calculations, however, show that there are more reporters and the table with manufacturing PMIs improving month-to-month in January with 61% of them improving compared to only 28% of them in December.

Progressive statistics that look at the percentage improving in three-months compared to six-months as six-months compared to 12-months and 12-months compared to a year-ago show diffusion improving from 39% to 44% to 67%-sequentially. For the current 3-month versus 6-month comparison, diffusion shows improvement in 67% of categories. Diffusion has been steadily rising, as the sequential comparison demonstrate, although that has not been accompanied by a steady increase in the median reading for the group – indicating how complicated it is to develop overarching metrics for the group. The median reading for 12 months is at 50; over six months that slips to 49.6 and over three months there's a slight recovery to 49.8. Diffusion indexes improve in three months compared to six months, but they're still lower than they have been over 12 months on average and the reading for diffusion over three months shows a tendency for manufacturing to contract.

The far-right hand column presents queue rankings that order the January estimates on data back to January 2021. On that basis, there are only six of the 18 observations that lie above a rank at the 50th percentile which means there are only 6 (or 1/3) above their medians for this period. Countries with observations above the median are Russia, India, Canada, Mexico, Indonesia, and Taiwan. The average of the median ranks is 40.8 percentile, a number clearly below breakeven output at 50 and indicating shrinking manufacturing activity in general.

The rankings by individual countries still show a great deal of variation and weakness. Japan and China, for example, have queue standings for the manufacturing observations in January that are in their 14th and 16th percentile rankings - these are extremely weak. Vietnam is in its 28th percentile, Turkey is in its 24th percentile, but even France has a reading only in its 22nd percentile. The euro area has a ranking at its 40th percentile, the same as Germany with the same ranking as the United States which is also in its 40th percentile. Manufacturing simply continues to be weak in January.

In January, eight of eighteen observations log diffusion values above 50 (indicating manufacturing expansion); this compares to seven in December and eight in November. Sequentially the three-month average of the PMI readings shows seven over 50-for three-months and six-months with nine averaging above 50 for the full 12-months. There has been slippage in recent months compared to the 12-month performance. And there may be more trouble ahead.

Summing up In sum, there is little evidence of real progress in train for the global manufacturing sector. The daily Baltic Dry index (and index of global trade volume) continues to drop to even weaker readings. With the U.S. beginning to impose tariffs, all bets are off. President Trump declared that U.S. use and threats of tariffs will gain it a better proposition in global trade when he is done, but in the meantime, he warns that there can be pain. Tariffs are just announced on Mexico and Canada with an extra tariff on goods from China. The EU has said if the U.S. imposes tariffs on them, they will retaliate. Mexico and Canada are already imposing counter duties of their own.

The tariff game... This tariff imbroglio is in part a game of national pride. No country wants to just ‘take it’ and not ‘dish it out’ as well. But the U.S. has run current account deficits for 33 years in a row and it imports far more than it exports meaning that the impact of U.S. tariffs on other countries will generally be much more painful than the impact of duties they put on a much smaller flow of U.S. goods. Still, the game goes on and will continue until there is a political solution. There is no free trade or free-floating foreign exchange values in this system, and there has not been from start. Recent estimates put total foreign exchange reserves globally at about $12.35 trillion (converted to dollar terms). That compares to nominal U.S. GDP at about $27 trillion. Economists will make free trade-oriented comments to make the case against tariffs (they disrupt ‘free trade, for example) but there is no free trade to disrupt. Tariffs and retaliatory tariffs are a real risk and are actually in progress. But the U.S. has a strong case for redress deriving from its ‘never-ending deficits’ that the foreign exchange market has been unable to cope with and unable to readjust the dollar’s value to deal with these persistent U.S. deficits. Countries generally have imposed larger tariffs on U.S. goods than we imposed on theirs. In many ways, Trump is on very solid ground in looking for better treatment, but economists do not like it because they prefer to carry the forward the hypothetical case of free trade even though it does not exist both because of trade barriers and because foreign exchange markets do not float values freely as evidence from the huge stockpiles of foreign exchange clearly shows. More to come on all this… and it will get worse for global manufacturing if there is much more of tariff setting and retaliation.