From Visual Capitalist
The chart shows the extreme-adjusted PMIs for manufacturing and for services for the Euro Zone (those countries which have the Euro as their currency), and for the average of manufacturing and services, which should be a good proxy for GDP growth.
The PMIs have now crossed the 50% "recession line", meaning that output is at last starting to expand, in response to interest rate cuts by the ECB. Will this recovery be derailed? Obviously, that's a possibility, but Trump's tariff pagaille is likely to be worse for the US than for Europe. Tariffs will cause a surge in inflation in the US, reducing real incomes and consumption, while also simultaneously delaying further Fed rate cuts.
Meanwhile, in Europe, the EU has agreed to increase defence spending, and to allow increased debt to pay for it, and you may be sure that the increase in defence spending will go towards European (& perhaps Canadian) rather than American contractors. Also, the ECB has leeway to cut interest rates again, because inflation is low, whereas the Fed does not.
The sum of US stagnation/recession, a European recovery, and an Asian upturn (PMIs have started rising there again, after slumping when the tariff war started), means that world growth will improve. But it won't be a boom, that's for sure.
Business confidence and sales/production surveys are among the first indicators out for the previous month. This is because they tend to ask simple questions: do you feel confident about the next 6 months/year?; or, are your sales up or down? They don't ask how much sales are up or down, which official department of statistics surveys need to know. They tend to be equally weighted, i.e., all respondents' replies count the same, whereas, say, official surveys of retail sales or industrial production weight the results according to the size of the company. The PMI (Purchasing Manager Index) surveys typically come out on the first day of the month, or soon after, and are surprisingly good guides to economic activity. I tend to extreme-adjust the data to remove large spikes, up or down, and in addition, I sometimes smooth the results, particularly for smaller economies.
The chart below shows the extreme-adjusted PMIs for the "big 8" economies, weighed by GDP. These are: the USA; the Euro area (countries with the euro as currency); the UK; Japan, Russia, India, China and Brazil. They make up ~70% of the world economy.
The green line is the one to watch, as it will be the closest guide to GDP growth, but available months before GDP data are released. It appears to be turning up. Of course, things could still go wrong. For example, the Israel-Palestine war could lead to a surge in the oil price. But for now, it looks as if the big 8 PMI has bottomed. Remember that as long as the PMI is below 50%, it implies that the economy is contracting, though if the PMI is below 50%, but rising, it implies that the economy is contracting more slowly.
However, composition also matters. The big jump in the services PMI in December comes from just 3 economies: China, India and (particularly) Russia. China is subject to big month-to-month fluctuations in its PMIs, relative to their underlying trends (so could be reversed next month); India is clearly booming; but Russia's economic data are becoming more and more questionable. Are companies/CEOs in dictatorships willing to tell depressing truths about sales/employment/production if they fear that anything they say could be used against them? Still, the "Big 4" average PMI (lower chart) is also showing a rise over the last few months, so even outside these three, PMIs are trending gently upwards.
None of these indicators point to a boom (except in India) but they do suggest that a lower turning point in the economic cycle is imminent.
It's perfectly normal for growth to slow after a strong rebound, as 'catch-up' effects diminish. That doesn't mean that a new recession is happening, or at least, not necessarily. ThePMI (Purchasing manager index) surveys are the most timely indicator of the state of economies for the previous month, becoming available on the first day of the new month. What I have done in the chart below is to extreme-adjust each country's PMI, weight them by their share in world GDP, and add the results together. The 'Big 8' include the USA, Euro zone, the UK, Russia, Japan, Brazil, India and China, and represents 70% of world GDP. I don't have PMIs earlier than 2011 for countries other than the EU, the USA and China, but there are other similar surveys with data going back two decades or more, so I spliced these series together to produce continuous data chains back to the late 1990s.
The PMI for the 'Big 8' has slipped from its post-covid highs, but is still at the levels reached in previous high points, such as the recovery from the 2008/2009 GFC and the Trump tax-cut boom in 2017/18.
We're not yet on a road to recession or stagnation. However, as Central Banks reset interest rates back to pre-pandemic norms, the chance of a global slowdown in 2024 increases. An attempt to cut budget deficits using austerity instead of growth makes a downturn more likely, more quickly. Note how the world PMI fell below 50% in 2012 when the EU foolishly insisted on tax increases and spending cuts to balance member budgets.
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As ever, this chart shows the extreme-adjusted versions of IHS Markit's PMI (manufacturing) and the Institute For Supply Management's ISM manufacturing index. Extreme-adjustment removes or attenuates extremes in the data (duh!) to give a clearer picture of underlying trends. In addition, if we take the average of two independent (statistically) time series, this also gives us a smoother picture―that's the green line in the chart below, and it's the one to concentrate on.
This is the strongest cycle over the last decade. A rebound from the covid crash, a fiscal sugar hit, and the record low Fed bank rate have all produced a massive stimulus. Which makes it inevitable that the Fed will start tightening policy, moving the Fed Funds rate back to pre-crisis levels―2-ish per cent. It's currently zero.
Their moves are likely to be cautious and measured, but all the same, equities are vulnerable.
