Feeble US recovery due to Trump

This chart shows the average of the PMI and ISM indices for the US (before 2011, it's the ISM alone), broken up into the services and the manufacturing sectors, and the average of the two, shown by the blue line.  (The relationship between the "whole-economy" PMI/ISM index and GDP is shown in the bottom chart, from 2000 to 2026, but I haven't updated the GDP data to include the latest release.)

After previous slowdowns or recessions, the rebound from the low point has been strong.  This time round it has been feeble.  Note how at the beginning of 2025, a strengthening recovery was aborted by Trump's tariffs.  Then, just as the economy started to pick up again, Trump's Iran war has caused a renewed downturn.  Now, so far, it's only one month of slowdown.  But if the Iran war and the oil blockade continue, which seems all too likely, this downtrend will continue.

The 1973 and 1979 oil crises produced deep recessions and strong inflation surges.  It looks as if this will happen again.

click to enlarge

Click to enlarge

Stagflation, episode 2

 These ISM sub-indices give implicit forecasts of the direction of prices and employment.

Thanks to the Iran War, prices (red line) are heading higher, and employment (blue line) lower.  

The shift in just one month (March) is obvious.  The longer this continues, the worse it'll get.

Warning of world recession from PMI/ISM data

When economists first started analysing the business cycle, it was manufacturing* which led the cycle.  The interaction between stocks (inventories), investment, and production meant that this sector of the economy was proportionately more influential on the business cycle than services.  Manufacturing led; services followed.

But services have grown as a percentage of GDP, and even though services don't have an inventory problem (you can't store a haircut or a plane flight), they are in a way more vulnerable to shocks to confidence.  If you fear an impending recession, or a big fall in your income, both of which seem likely as the Iran war drags on, you can cut services immediately.  Don't go out for dinner, don't take a holiday, don't go to shows, have fewer haircuts, and so on.  Of course, you might also postpone buying a car or a house.

What we see in the big 8 (US, UK, Euro zone, China, Japan, Russia, India, Brazil) PMIs shows this split.  Manufacturing is finally recovering from the shock delivered to the system by Trump's tariff stupidities.  Even European manufacturing is now expanding (i.e., in this context, above the 50% "recession line").  Yet, the services PMI has plunged.  And the biggest falls are in the USA and the Euro zone.

If the Iran war is quickly resolved, with irreconcilable differences being papered over for now, it is probable that services could rebound as quickly as they did after Covid.  And a rapid, if short-lived, peace may lead to falling oil prices, which will ensure that Central Banks do not raise interest rates.  But a prolonged conflict will lead to a deep recession and, because inflation will remain high until well into the recession, CBs won't be able to cut rates.  The cut to oil supplies is much bigger than in the 1973 and 1979 oil crises, and those both led to deep recessions and strong inflation surges.

So, whether we get some sort of "peace" or not, is key to whether we enter a deep recession or just a small downward blip.  Trump wants an "off-ramp", of any kind, so my guess is that if Iran agrees to the nuclear deal it agreed to with Obama, and was about to agree to when the US attacked this time, he'll declare a victory and walk away.  But Iran will have demonstrated that it can choke off oil and gas supplies at the drop of a hat.  This is not a recipe for longer-term stability.  So we may see this futile war start and restart over the next while, like embers left over from a bushfire, which means stagflation is horribly likely.

* Actually, in the early 1800s, it was agriculture, because 90% of output and employment was in agriculture.  So what drove the business cycle was the 11-year sunspot cycle.  

US manufacturing picks up in January

 As usual, the line to watch is the thick green one.  

To recap:  

• The economy started to recover in late 2024, the expected response to the Fed's earlier interest rate cuts.
• But this recovery was aborted after Trump massively increased uncertainty with his tariffs
• A year later, we are seeing the first tentative signs that the recovery might have resumed.
• But note, the upward slope of the green line is much less steep than in previous recoveries

US manufacturing weakens

 As always, if you average two (statistically) independent time series, the standard deviation of the average is less than either of its components.   This is why I like to look at an average of the ISM and the PMI surveys, which are the two earliest data released after the end of the previous month for the US economy.   That is the green line in the chart below.  In addition, to further reduce random fluctuations, I have extreme-adjusted both series.

The ISM manufacturing survey has been falling (more or less) since January, whereas the PMI has been rising.  Now both are declining, and the average has slipped back below the 50% recession line.

This is just manufacturing  (the services data are due in a couple of days).  But it points to ongoing weakness in the US economy.

US private data index suggest ongoing weakness

 I've updated my US private data index, originally created to fill the gap caused in public data by the prolonged shutdown.  I've also added another constituent time series, the "optimism" index from Real Clear Markets, and I've extended the calculation back to 2010.  

Note how the index plunges after the Fed raised interest rates, then started a recovery in late 2023, and fell sharply after Trump came to office.  It's still falling.

Doesn't look as if employment will be growing fast any time soon.

And this is what the year-on-year change in the index looks like.   One struggles to describe this as a "strong economy".

Observe that all the trends are still down.  

The chart below shows the sub-indices in the ISM whole economy index, for prices paid and employment. The surge in inflation appears to be over, but the ISM employment data suggest that employment is weakening.  Again, note how it had started picking up only to fall in a heap since January

US manufacturing stagnates

As usual, the line to watch is the thick green one, which should have less variability than either individual index. (Both indices are extreme-adjusted, but that mostly just reduces the down spike caused by covid in 2020.)

Right now, the manufacturing PMI index is rising while the manufacturing ISM index is falling.  This divergence in direction hasn't happened before. In 2017/18, a gap between the levels of these two indices did open up, but their direction was roughly the same.   But since late 2025, the PMI has been rising, while the ISM has been falling.

Which is "correct"?   We won't know for another few months.  What we do know is that the average of the two is flat, and only just above the 50% "recession line", in other words, stagnating.  If you feel compelled to go with the "better" index, that's prolly the ISM*, which goes back to 1947, when it was called the NAPM* index.  It has correlated well with every major and most minor business cycles since then.  And it looks as if it's falling.

*NAPM = National Association of Purchasing Managers.  ISM = Institute of Supply Management.  I suppose they thought that sounded a bit grander.

My private sector index looks ..... terrible

I've updated my composite index of private sector data sources.  They now are (equal weights):

1. The whole-economy ISM index
2. The whole-economy PMI index
3. The University of Michigan consumer sentiment index
4. The Conference Board's consumer confidence index
5. The LMI logistics index
6. ADP's monthly job change
7. Challenger's monthly job losses
8. "Jobs easy to fill", from the NFIB survey (data only through September; October values out this week)
9. "Jobs are plentiful" from the Conference Board survey

I've plotted the resulting index after extreme-adjusting it, mainly to remove the massive down-spike during the Covid Crash. 

It looks more bearish than my previous index.  In fact, it looks terrible.

[Here is my first piece about my private sector data index]

For the data nerds among you, here's the chart of the index before and after extreme-adjustment:

Europe drives world econ higher

 We now have all the PMI and ISM data for October.   

The GDP-weighted averages for the Big 8 manufacturing and services PMIs are shown below.  The Big 8 are:  the USA, the UK, the Euro zone, Japan, China, Brazil, Russia, India.  Together, they make up roughly 70% of world GDP.  

Services rebounded sharply in October, pushing up the average of the services and manufacturing PMIs (the green line in the chart)   Most of that rebound was in Europe (from 51.3 to 53.0) and in the UK (from 50.8 to 52.3).  Russia also rebounded, from 47 to 51.7.

While the recovery in manufacturing has been sluggish, services have been surprisingly strong.

Historically, the main drivers of the business cycle have been manufacturing and construction, with services following, because of the inventory (stocks) cycle.   So far, the recovery in manufacturing has been weak, but services have held up, which is interesting.   This suggests that Trump's trade war is affecting manufacturing, but since tariffs haven't been set on traded services, it is not affecting services.  The problem is: how long can this disconnect continue?  If manufacturing goes back into recession, services will surely in the end follow.

Business confidence in the Big 8 is picking up too, also driven mostly by surging business confidence in Europe.

My view of the world recovery and the negative effects of the Trump tariffs has so far been too pessimistic.  Perhaps, like Brexit, it will take a couple of years for the negative effects outside the USA to become apparent---they are much clearer within the US.  Yes, manufacturing is soggy, as the trade war has (some) effect.  But services are responding in the normal way to the fall in global interest rates over the last year.

So far, though the recovery has not been steep, it is clear that the world economy is picking up.  How sustainable that is, isn't clear.

[As usual, the data come from a variety of sources, including S&P Global, the ISM, and the OECD, among others.  They are my calculations for extreme-adjustment and the GDP-weighted indices]

US economy soggy

 The government has stopped publishing economic indicators, because of the shut-down, though no doubt it suits them as the data are probably less than scintillating.   So we have data from non-government analysts, including the Institute of Supply Management (ISM) and S&P Global (PMI).

To increase the signal-to-noise ratio, I extreme-adjust each time series (this removes or attenuates large up or down "spikes").  In addition, if you have two statistically independent time series, the average will have smaller month-to-month fluctuations than either individually.

In the chart below, the dotted red line shows the extreme-adjusted PMI series for manufacturing, the dotted blue line the extreme-adjusted ISM series for manufacturing, and the thick green line the average of these two series.  Normally, the PMI and the ISM move more or less in sync.  Over the last few months, they haven't, with the PMI rising while the ISM is flat.  I don't know what's going on here, but the ISM has been going for many decades, so it has somewhat more credibility.  For now, I'll stick with the average, which is just above the 50% recession line, but not by very much.  In other words, a sluggish economy.  And one, which without spending on AI, would be slumping.

Big 5 PMI dips in September

I've taken a few days to comment on the latest S&P Global PMI data (the data were released last week).  Apologies.  I've been wrestling with some "real life" problems.

These are the preliminary ("flash") estimates for PMIs for September.    They cover about 80% of the panel respondents in each country/zone, and will be slightly revised when all the final responses are in.

The Big 5 average, which is weighted in my calculation by PPP (purchasing power parity) GDP, fell in September.  The Big 5 are : the USA, the Euro Zone (countries using the Euro as a currency), the UK, Japan and India.  Together they make up just more than 50% of world GDP.   I also extreme-adjust each time series before including it in the calculations.  Extreme-adjustment removes or attenuates sharp spikes in the underlying data to make it easier to see trends.  

Is this the beginning of a new mini-downturn?  I still think that Trump's tariff débâcle will slow world growth, especially in the US.  The underlying trend working in the opposite direction is that the world had started a recovery in the second half of last year as the effect of rising Central Bank discount rates wore off.   Plus, CB's have been cutting rates for the last year.  Since economies respond to falling interest rates with a 12 to 18 month lag, you would expect economies to be picking up steam now.  However, this recovery is being offset by the direct impact of the tariffs, and by the uncertainty of constant changes in policy.  In the US, in addition, food prices have been affected by the government's assault on undocumented immigrants.  Rising inflation in the US is likely to reduce consumer spending.

Except for India, which has its own strong boom going, manufacturing is down in all the economies.  Services are holding up better. 

The first fall for services, manufacturing and the average in six months

Here are the charts for each country/zone individually:

The US:

The US is still growing moderately, on these data, but services and manufacturing are both down on the month.  [Since PMI data are only available back to 2012, I have spliced the relevant ISM data to the PMI data to get continuous time series before 2012]

The Euro zone:

The Euro zone is recovering, but it's not booming (it's just above the 50% "recession line"), and the manufacturing PMI has turned down for the first time in many months.

The UK:

The UK is in trouble.  The average PMI is below the 50% "recession line", and it's falling.

Japan:

Note how it is just services which are holding up the Japanese economy.  Manufacturing is sliding.

India:

The boom in India is very obvious in the data (I've smoothed each time series with a 5-term centred linear moving average because Indian PMIs are quite "spiky" month-to-month).  

[Data sources: S&P Global and ISM, with my extreme-adjustment, moving averages and weighted totals/averages]

US econ still drifting

 The PMI release for August suggested that the US economy was, strangely, picking up.   Of course, that is still possible.  Responding to every zig and zag of monthly data can be a mistake.  And normally, that's not necessary: the big cycles in the economy are caused by shifts in monetary and fiscal policy, and these take months, sometimes many months, to take effect.  We have plenty of time to see whether each little blip in the data is in fact important.  

However, Trump's trade wars and the deportation of millions from the labour force is massively disruptive.  It has short-term as well and long-term consequences.  And by their nature, the short-term consequences should start showing up in recent data.   Now, the theme seemed to be that up to the end of last year, there was a nascent economic recovery, in the USA, and globally.  All the indicators were picking up.  Then from February onwards, US indicators plunged, and the S&P Global PMI suggested that that plunge has ended and growth is once again accelerating.  The latest ISM (Institute of Supply Management)  manufacturing survey rose only a little in August.   In fact, since January, the two time series have been moving in quiet different directions.

The chart below shows the extreme-adjusted S&P Global and ISM manufacturing survey results, and their average.  Because an average of two times series which are (statistically) independent has a lower standard deviation (lower error term) than either separately, the line to focus on in the chart below is the thick green one.

US flirts with recession

 The ISM for services came out last night. It "surprised the markets" by falling instead of rising.

The chart below shows the ISM for services and the ISM for manufacturing, both extreme-adjusted.

Note how there have been a few times in the past when one was going up and the other down.  However, over the last few months, since January this year, and Trump's trade wars, both have been falling.

The chart below shows the simple average of the two time series in the chart above.

In the past, when this average has fallen below these levels, there has been a recession: 1989-1991, 2001, 2009.  The trend is clearly down, and there is no reason to assume it will change.  The rise in tariffs is a significant fiscal shock, since, contrary to Trump's beliefs, it is American residents who will pay the tariffs, which are the equivalent of a rise in taxes.   In addition, there is the huge uncertainty imposed by his shilly-shallying.  One day the tariff is 10%, the next 35%.  Then it is postponed for 90 days.  Then because the leader of the other country doesn't suck up to Trump enough, it jumps to 50%.  Only to be postponed for a month.  People who invest in plant and equipment, and consumers who spend on consumption goods, close their wallets.  When cash is king, economies go into a recession.

This will be the first recession in my long involvement with financial markets, which has been entirely caused by rank stupidity.  And Trump's response?  He sacks the people who produce the stats.

The Fed isn't going to save the situation.  It will be reluctant to cut rates until it is sure that the inflationary impulse caused by the jump in tariffs has passed.   And when it does cut the Fed Funds rate, it will take 9 to 15 months for the economy to respond.  

US definitely slowing

 This chart is prolly very familiar to you, as I've shown it often before.    It shows the extreme-adjusted ISM and PMI surveys for manufacturing, as well as their average.  As I've mentioned before, if you have tow time series which are (statistically) independent, their average will have a smaller  "error" than each one individually.   Extreme-adjustment removes statistical outliers, especially big "spikes" up or down, such as during and after Covid.

As ever, the line to watch is the thick green one.

The world, including the USA, had begun a new upturn, as the effect of tightening policy by the world's Central Banks had started to fade.   That process, in the US at least, has reversed.  And it's just the beginning.  Note that the average of the two surveys (the green line) has fallen back below the 50% "recession line".

US slowdown

 I remain convinced that the US is slowing.  Just how deep the downturn is, I cannot tell, because there are so many factors changing so rapidly.  Trump's policies and policy shifts have damaged confidence and increased uncertainty, and there is no knowing when rational policy will be followed.  In the meantime, all we have is the current data.

The chart below shows the unweighted average of the ISM manufacturing and services surveys, and I have been following it for more than 20 years for its insight into what is happening in the economy.  

Note how the whole economy ISM had started to rise, but from February onwards has been falling.  The start of the decline coincided with Trump's inauguration.  This can be more clearly seen in the chart below, which shows the same data, but for a shorter period.

Of course, there are many indicators, and they show varying pictures for the first five months of this year.  But, as I said, I have followed this indicator for a long time, and it has proved reliable.  Note that I extreme-adjusted each time series before I added them together, but the extreme-adjustment process only slightly reduced the January observation for the manufacturing PMI from 50.9 to 50.3.
 

I'll keep you posted.

US recession just starting

The chart shows the extreme-adjusted ISM and PMI for services and manufacturing, and their average (thick pink line).  Because the ISM and PMI surveys ask different questions, of a different sample of  the relevant populations, on different dates, their average will have a smaller random fluctuation (they are statistically independent).  In addition, extreme-adjusting the underlying series removes large "spikes", up or down.   The extreme-adjustment in April reduced the downward spike.

What is happening is perfectly clear.   The economy was starting a renewed upturn when it was hit by Trump's tariffs.  This is just the beginning, as each month of uncertainty worsens confidence and the willingness to spend or invest.   Even if Trump wishes to reverse course, confidence has been damaged, and it will take months before it's restored.  Also, the economic downturn so far, is before prices have started rising, and before retaliation by other countries.  Will the Fed cutting rates help?  It also will take time to affect confidence.

My estimate is that the risk of recession, i.e., negative GDP growth is above 80%.

US ISM & PMI pick up

 As usual, the line to watch is the thick green line in the chart.  This is the average of the extreme-adjusted manufacturing ISM and PMI surveys.  Since these surveys are (statistically) independent, the average will have a lower error term than either individually.

The ISM services PMI is out later tonight (my time zone), so I'll report on that tomorrow.

Far from a boom, what these data show is that the economy is certainly not sliding deeper into recession; on the contrary, it is prolly starting to pick up.  Trump will get the credit, though economies respond with a lag to policy changes, so the rise is due to Biden-era policies.   

World PMI soggy

 Not a recession.  But certainly very far from runaway growth.   Services holding up, manufacturing sliding, with the average still above the 50% "recession line".

Big 8 = USA, Euro Zone, China, UK, Japan, Russia, Brazil, India, making up 70% of world GDP.  I extreme-adjusted each series before adding them up, weighted by PPP-GDP.

US still in uptrend

The ISM manufacturing index was down for May, the PMI up.  Average up a touch, but down on March.

Do these data change my perception of how the US economy is moving?  No.  The economic recovery continues.  Monthly data always show random month-to-month fluctuations.  That's why, in this case, I combine the PMI and the ISM indices.  Often their random fluctuations offset each other, as indeed happened in May.

As always, the line to watch is the thick green one.

Further confirmation of the US recovery

 The chart below shows the logistics managers' index compared with the average of the PMI/ISM indices.  The PMI and ISM indices are both extreme-adjusted, and the Logistics Index is smoothed with a 3-month moving average.   The recovery is strengthening.