Economy in Brief

The PMI flash data show essentially flatlining, steady, responses over the last six months. There is a hint of uptrend in the EMU manufacturing series but not much more than a hint. Across reporters in the table, three-month changes in the individual gauges are small everywhere, except the U.K. where relatively strong gains are posted.

Over three months all services gauges are weak with Germany’s 5.6 points decline the largest and the U.K.’s one point decline the smallest. Manufacturing shows two declines over six months, one in France and one in Japan. The U.S. and Germany show the largest gains, posting a rise over six months of about 2 points. However, services gauges dominate the total PMI measure that show declines across the board over six months, with Germany, the EMU, and France logging the largest drops over six months. These point-to-point changes might exaggerate the trend. The average PMI gauges are far more stable.

The 6-month vs. 3-month averages were consistently weaker by about one point or less for the PMI total index except for the U.S. where a near 2-point drop prevailed. Manufacturing 6-month vs. 3-month PMI averages differ by small inconsistent amounts of change across table reporters – the U.S. logs a drop of one point. And the services 6-month vs. 3-month average difference fell by about one point across the board across table entries, but nearly double that in the U.S.

The color-coded table shows strengthening and weakening on the monthly and period sequential data. Monthly data show a good deal of chaos. The 54 observations over those six reporters with 3-metrics each (Composite, Manufacturing, and Services) over 3-months tallied 25 monthly weakening observations vs. 29 strengthening observations. That is quite mixed.

However, the broader sequential changes are much more consistent, showing over the three periods 45 weakening observations vs. nine improvements over 54 observations. The sequential data show clear-cut weakening. Only manufacturing shows strengthening over three months – three of them: for the EMU, Germany, and the U.K. Over six months only the U.S. shows an improvement- it was also in manufacturing. The upshot is that monthly data may be chaotic, but there is a clear trend there.

The queue standings show an average composite standing across members in their 28th percentile. Manufacturing stands in its 11th percentile and services in its 35th percentile – all quite weak. However, only the EMU, Germany, and France had composite PMI diffusion index levels below 50 in December. This underscores that to be weak (in a ranking sense) the PMI does not need to show a decline (reading below 50). PMIs are usually above 50 because services and manufacturing usually expand. Even over this weak-stretch, the service sector PMIs across the reporters in the table were above the breakeven level of 50 about 64% of the time vs. 53% of the time for manufacturing.

From May 2021 to June 2022, the proportion of reporters with both services and manufacturers at PMI values above 50 in the same month, was above 50% consistently. After July 2023, fewer than 20% of the reporters have both services and manufacturing above 50 in the same month. This has been a period of protracted weakness - and it continues.

All of the countries in this table have inflation targets of some sort set up at the 2% mark. While inflation rates clearly have worked lower, this has only come after an extended period of inflation having overshot in each of these countries. However, central banks have generally raised interest rates quite a lot and concerns have been raised globally about the potential for recession- the Bank of Japan has been the exception to these circumstances, having expended effort trying to recover from deflation and avoid a low inflation trap.

Something in the water?- I don't know if there is something in the water- which I should note would imply the oceans- or more properly the global aquifers as well as the impact of global rainfall (climate change at work?). Something has caused central banks to change their tune as central bankers, in this cycle, have clearly acted differently than in the past and have not aggressively gone out to contain inflation overshooting. Instead, central banks have been slow to act and tolerant of inflation over their respective targets. I'm not aware of global monetary conference that established that this was now the correct way to approach inflation in the new millennium. However, this is the situation that has simply developed and seemingly developed in each country on its own.

Fed policy puts Europe’s central bankers on the spot- Key central banking decisions have been made over the last several days with the Federal Reserve opting to not change policy but to provide statements about its intent in the future as well as a procedure known as forward guidance that is encompassed in a collection of forecasts that the Fed makes public four times a year in a presentation known as the Summary of Economic Projections (SEPs) or sometimes somewhat more colloquially called ‘the dots.’ With its new guidance, the Federal Reserve put markets on notice for a likely easier policy in the period ahead and this caused expectations to ramp up for the policy meetings today at the Bank of England and the European Central Bank. However, neither of these banks took the bait that the Fed went for. The ECB went out of its way to say there was a large distance between raising rates and cutting rates and that rate reductions were not even discussed at this meeting.

Central bankers’ dilemma- Central banks are in this somewhat curious position where inflation has fallen sharply. Although I've only presented year-over-year, three-month, and six-month calculations for some of the more ‘popular’ inflation measures, there is also core inflation, which is inflation excluding food and energy, and there are inflation calculations that make other exclusions that can cause the short-term inflation rate to look much lower. This fact has raised pressure on central banks particularly on the Fed in the U.S. to begin to consider an easier policy. The Federal Reserve, of course, is in a different position than these other central banks because while the Fed has an inflation target, it also has a dual mandate. The ECB, for example, has no such dilemma. It only has an inflation mandate to keep inflation at 2%.

Saying you do not believe in gravity does not allow you to escape its pull- While the Fed in the U.S. always says it doesn't react to political pressure, the Fed has been under tremendous political pressure especially by progressive Democrats to do nothing to cause the unemployment rate to rise despite the height of inflation that U.S. economy has been laboring under. In addition, the U.S. faces presidential elections within the next year and that's been a burden that the Fed has had to deal with. And it simply isn't possible to have been involved in policy economics in the United States to not think this has been a factor regardless of what Jerome Powell or anybody at the Fed says about making policy.

An uncomfortable reality- The situation all the central banks find themselves in is that inflation has been too high for too long. Year-over-year inflation is still too high, but over shorter periods inflation is running at a much lower pace and coming closer to their desired targets. And, of course, politicians in all countries whether they're running for office this year or not, want to keep the unemployment rates low as do other policymakers- hey it’s everyone’s objective, but within reason and context. Unemployment rates globally remain low; the European Monetary Union is experiencing among the lowest unemployment rates it has seen in its life; the U.S. unemployment rate is not far from the lowest it has experienced in the last 50 years; U.K. unemployment is not so well positioned. It may seem somewhat curious that in the case of the U.S. central bank that has a dual mandate it is protecting an unemployment rate near a 50-year low and tolerating an inflation rate that has had horrific overshoot that has been above its target for 34 months in a row -and may remain out of range for another 24 months – if you miss it for five year in a row, is it still relevant as a target? Still, we're supposed to believe that this set of decisions has occurred without any reference to politics.

Japan’s unique state- The Bank of Japan now faces the most consistent persisting inflation among this group of countries; however, it's in a different circumstance because prior to the impact of COVID and the global recession that resulted, it was chronically undershooting its inflation target and worried about that. In Japan, the concerns are rather opposite to those in the European Monetary Union, the U.K., and the U.S., as in Japan policymakers wonder if the increase in inflation is going to be permanent or not. Japan is still relatively more worried about a possible return to low inflation or even deflationary circumstances - although you can't see any evidence of that in the data presented in the table.