Is the world economy really recovering?

 Or has it started a new recession?

I collect and maintain hundreds of time series from countries all round the world: North America, South America, Asia, Africa, Europe, Australasia.   I have a program which adds together all the series and produces a composite index of them all.   It's unweighted, but the number of component series is highest for the US, China and Europe.  Most countries are represented.  I monitor PMIs, industrial production, retail sales, unemployment rates, inflation rates, business and consumer confidence, money supply, car sales, and so on, for most of these countries, and for the big ones, many more.  For example, "jobs easy to find" in the USA, and "production of bullet trains" in China.  Where necessary, I seasonally adjust each time series.  My world composite index is made up of 430 series.

The result is shown below.  The year-on-year rate of change in my world composite index is compared to the rate of change in my weighted world index of industrial production.

The YoY % change in my world IP index is barely above zero, and for my composite index, it's off its lows, but is still below zero.  In other words, it's still falling, but is falling more slowly.

This is consistent with a sluggish recovery, but not a new recession.  This view is confirmed by my US leading indices, which point to the strong likelihood of a sustained recovery, though as I said in my previous post, my leading indices do not include fiscal stimuli.  Be that as it may, my US leading index leads the world economy by +-6 months, and it's only levelled off in the last couple of months.  This recent blip is not at all consistent with a deep recession.

So why have world stock markets fallen so sharply? The reason is probably because there was excessive optimism.  Investors and traders believed that there would be a strong recovery, and marked up share prices accordingly, misled perhaps by the rebound from "revenge spending" in services.  There was also a nice little bubble around AI, which has been hyped.  It reminds of the dot-com boom in the early 2000s.  The market is beginning to doubt that AI will make much money for the global IT behemoths.

I don't think there will be a renewed recession, what has been called a "double dip" recession.  But I do think there will be a very sluggish recovery for the next few months.  China is weakening; Europe is struggling, and the rate cuts by the ECB (European Central Bank) have been too little, too late; the US is slowing as fiscal stimulus drains out of the system, and the Fed should have started cutting rates a few months ago.  Emerging markets are in strife, because their currencies are falling because of  "the flight to quality", imposing new and unwelcome constraints on their economies.

My guess is that the fears engendered by the stock market plunge will bring forward and accelerate rate cuts, not because Central Banks care about investors per se, but because sharply falling share prices suggest that seasoned observers of the economy have seen what is happening more clearly than they have.  And of course, plunging share prices will affect business and consumer confidence.

Interesting times.  

Central Banks were too late raising interest rates after Covid, and are now too late cutting them.  Their staffs are paid quite a lot to get things so wrong.