Oz recession deepens

This is an unweighted composite index^ of the AIG (Australian Industry Group's) PMIs for manufacturing, services and construction, and S&P Global's PMIs for manufacturing and services.  The AIG indices have been smoothed with a 7-month centred moving average before inclusion in this composite index.

Conclusion: the Ozzie recession* continues.

^ Note on composite indices.

Since time series are subject to random month-to-month and quarter-to-quarter fluctuations, interpreting the data can be tricky. You can reduce this random variability by adding two or more statistically independent series together.  This will reduce the error term without affecting the underlying trend.  Or you can fit a moving average to the data, which also reduces the error term, as each month's "error" is statistically independent of the previous month's.  I tend to do both.  So, this composite index of 5 different time series, 3 of which have been smoothed before inclusion, should give us a much more reliable indicator of the economy than any single component.

* Note on the definition of a recession.

The conventional definition (in the media, anyway) is two quarters of consecutive negative GDP growth.   A moment's thought shows that this is not a useful definition.  Just one example—suppose GDP falls by 5% in Q1, rises by 0.1% in Q2 and falls again by 5% in Q3.  It is crystal clear that there has been a recession from Q1 to Q3.  The conventional definition would deny that a recession has taken place.  

Also, should you use GDP or GDP per capita?  If you have rapid population growth, as Australia has had over the last five years because of very high immigration, GDP per capita has on occasion fallen when total GDP has risen.  To most people that will "feel like" a recession, though one might argue that it isn't.

You could use smoothed GDP, by for example fitting a moving average to the data, and then seeing whether the moving average has declined.  Or, as I tend to, you could examine 30 or 50 or 100 series and see how many are falling or rising.  If more than half are falling, it's a recession.  That is what my diffusion indices attempt to estimate.

I haven't updated my Oz coinciding index or diffusion indices—I need to update my data banks, and the way I feel right now, that's all too tedious—but I'm quite certain Australia is in a recession.  However, I'll update my data shortly, and then confirm the exact month I think it started.

Will Oz's recession last?

 I talked here about how all the various "PMI" surveys in Australia are falling, and how this prolly means that Australia is already in recession.

What I've done below is to combine all series into a single indicator.  You can see the plummet during COVID in 2020, the strong rebound after, and then a renewed plunge when there was a second lockdown in 2021.  Then the economy slowed as the rebound faded and as Australia's Central Bank, the Reserve Bank of Australia, tightened monetary policy.

We started a new recovery in 2024, but this faltered late last year as the RBA raised rates, and went into free fall with the Iran War.

The chart below shows the relationship between the economy (as represented by the combined PMIs) and the Reserve Bank's "cash rate".  Because I've plotted the RBA's cash rate (which is equivalent to the Fed Funds rate in Australia) inverted, when the blue line rises on the chart, the cash rate is falling on the chart, and when it falls, the cash rate is rising.  The two move in sync except for the COVID crash, when what economists call an "exogenous factor" caused the economy to plunge.  Note that interest rates aren't the only factor shifting the AU economy up or down.   For example, in 2019 (before COVID), the economy slowed because of a slowdown in the world economy.  A tentative recovery had begun, here and overseas, when COVID hit (January 2020).

So, if the RBA doesn't raise rates again, will the economy start to recover?  It's possible.  But remember, the world economy is likely to slow, even if there is a "ceasefire" in the Iran war.  A return to normal will take months, and uncertainty will continue to hamper those famous "animal spirits".  And some countries/regions, in particular, Europe and Indonesia, have already raised interest rates because of soaring inflation.  Indeed, the RBA may yet do the same thing as Australia's inflation accelerates.  And that will slow growth.

My best guess:  growth will slow further for a few more months.  Interestingly, all the growth in Q1 was from investment in AI data centres.  If that bubble bursts, we'll all be in serious trouble.

Happy days.

Australia slides into recession

 Just as is happening with the big 8 economies, the Australian services PMI is falling, though here, the manufacturing PMI is also falling.   There are plenty of anecdotal reports of plunging services:  declining visits to restaurants, slumping coffee sales, and so on.  Unemployment is rising, retail sales are sliding.

As usual, the Reserve Bank (RBA) has raised interest rates at precisely the wrong time, covering itself with glory yet again.  

The 2021 slump in the services PMI was caused by a Covid lockdown

 The chart below shows the S&P Global manufacturing PMI and the Australia Industry Group's survey (where I've adjusted the latest data to keep them comparable to the AI Group's historic data).   So, sliding into recession.  

No, the world economy isn't booming ...

 ... even though the manufacturing PMIs are up.

In the chart above, the dotted blue line, representing the big-8 manufacturing PMI, has jumped since the start of the Gulf War, while the services component (dotted red line) has plunged.  At first sight, the jump in manufacturing appears reassuring, but it is misleading.  In commentaries for individual countries, not just the big 8, but others, S&P Global, who calculate these indices, mention that many correspondents have increased stocks (inventories) to try and mitigate the rise in prices they think likely to happen.  In turn, this has led to increased orders and production--remember that everybody's spending is someone else's income.  But when prices have risen, there will no longer be the incentive to build up inventories.  Sales will drop, until inventories are once again in sync with demand and production.  De-stocking will occur, reducing output, sales and employment.

In contrast, services can't be stored in inventories.  You can't 'keep' a haircut or a meal in a restaurant or a holiday or an air trip.  You can't have a stack of services like these in a box in a warehouse.  And because people are directly, right now, feeling the effects of surging oil prices and increased uncertainty, they have cut back.  And until confidence is restored, that will continue.  As the dotted red line shows, services are already in trouble.

But confidence will be very hard to restore.  The US has shown that it does not care about the stability of the world economy or the oil market, and there is no obvious off-ramp for Trump and his haplessly amateur administration.   The oil market is in chaos, and very shortly demand destruction, that is, the reduction in GDP and spending and production to bring oil demand and supply into balance, will begin.  In the short term, oil demand is extremely inelastic, i.e., it is unresponsive to price.  In the longer term, of course, things will happen to shift the relationship between oil demand and GDP, such as switching to EVs for example, or making jet engines and aeroplanes more efficient.   But until those changes take effect, the only way to bring oil demand into balance with oil supply is to contract demand.  The longer the war lasts, the worse the downturn will be.  This is clearest in air transport, where a physical shortage of fuel will constrain the number of flights.  But it applies to road transport as well.  Also, how do people who drive to work by car cut their petrol use?  They can't, so they'll spend less on everything else.  Demand will fall as prices rise.

Economies take time to stop, and time to re-accelerate.  The services PMIs show an immediate response, which will spread into the rest of the economy, soon.

Every previous oil crisis has been followed by recessions.  This one will be no different, unless the war ends now.  And that seems extremely unlikely.

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

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

Big 8 soggy

The chart below shows the purchasing managers' index (PMI) for the big 8 economies/regions (US, Euro Area, China, Japan, UK, Brazil, Russia, India), which make up just over 50% of the world's GDP.  The blue dotted line is for manufacturing, the red dotted line for services, and the green line is the average of the other two.

The service PMI is improving, but the manufacturing PMI is weakening enough that the average is sliding.

The conclusions are pretty much the same as for the other indicators we've looked at recently: a faltering recovery, though not yet recession, but certainly stagnation.  The US's index is levelling off, the UK's drifting higher, Russia's and China's also fractionally better, Japan's is flat, India's has slowed a lot since July, Europe's is weakening.  So, a mixed result, consistent with stagnation rather than slump.  That may change as new data emerge, and I think the risks lie to the downside. 

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.

Europe's PMI turns down

The dotted lines show the PMI indices for manufacturing/services for the Euro Area, each extreme-adjusted (by me) to remove "spikes".  The solid red line shows the average of the other two.  

Up to two months ago, the red line had been rising, pointing to an economic recovery.   Normally, manufacturing and construction lead services, and the manufacturing PMI has been falling, so the fall in the services PMI probably isn't a fluke, but a response to the downturn in manufacturing,

China's PMIs have picked up fractionally, but Europe's, the USA's, Brazil's and Canada's manufacturing PMIs are falling, with most other countries' going sideways.

Again, not recession, at least not yet, but clearly stagnation. 

 

World PMI very sluggish

This is my calculation of world manufacturing PMI, compared with J.P. Morgan's calculation.  I only started keeping the J.P. Morgan data in 2011, which is why I needed to make my own calculation to understand previous cycles.  Where I don't have back data for individual countries, I have used manufacturing business confidence, and estimated what each country's PMI would have been if it had been calculated by IHS Markit (which used to publish PMI data before S&P Global took over.)  In some cases, I have smoothed the input series (some, such as ABSA's PMI for South Africa, or the AIG PMI for Australia or Canada's Ivey survey, are very "spiky", i.e., have large month-to-month random errors.)  In other cases, I have extreme-adjusted the series before I used them to calculate my estimate of world PMI.  This mostly, in effect, reduced the down spike from COVID, but had some small effects elsewhere.

Why this chart is interesting is because, hitherto, in all recoveries, from deep recessions or shallower slow-downs, the rebound has been sharp.  This cycle, it's been a slow, and not especially steady ascent.  Observe that it actually began a steep-ish recovery at the end of 2023, before it fizzled out.

Obviously, Trump's tariff tango has something to do with this, but I suspect there's more to it.  Inflation isn't falling like it should be when the economy is so sluggish, and part of the reason for that is the growth of monopoly and oligopoly is the US, and the West's determination to stop China exporting its deflation to the world, particularly in cars, solar panels and batteries, via tariffs and quotas.  Why was inflation lower before Covid, when manufacturing was just as concentrated as it is now?  Because everybody expected inflation to remain low.   But in the Covid rebound, firms found that they could indulge in a bit of "greedflation", and pushed up their margins, and expectations have accordingly shifted.  Monopolies and oligopolies now know they can shove up prices every year by more than they used to, and get away with it.  To use more technical terms, inflation over the last few years has been more cost-push than demand driven.

Sluggish growth may well continue, even though Europe is clearly (finally) recovering.  But higher inflation means that Central Banks will be reluctant (=slow) to cut interest rates.   And if the AI bubble pops, the US will go into recession.   If that happens, the US dollar will plunge, pushing other economies themselves into slow-downs or recession.  

Of course, happy days may be here again.  But I hae me doots.

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.

China's manufacturing PMI heads south

Showing just how pernicious the effect of Trump's tariff tango is, China's manufacturing is suffering at pretty much the same time as the US's is also sliding.  A triumph.

The chart shows the average of S&P Global's and the official NBS manufacturing PMIs, extreme-adjusted, and smoothed using a 3-month centred moving average.

During and just after Covid, it became important to watch services.  In a normal business cycle, it's manufacturing and construction which drive the cycle, because of the inventory (stock) problem.  Services, on the other hand, tend to fluctuate much less over the cycle, so the aberration of big swings during and after Covid is probably over, and manufacturing is once again important.  (Though, to be fair, in the US, confidence is so damaged that services may still be affected.)

It remains to be seen whether manufacturing drags down services and with it GDP, globally, but that has to be a big risk.  

US PMIs: growth OK-ish, prices not.

 The latest PMI data for the USA show that the economy is still advancing, perhaps a little more slowly.

S&P Global's comment on prices suggests inflation is likely to pick up:

Input cost inflation accelerated sharply in November, hitting the fastest rate for three years barring the jump in costs seen in May. Tariffs were again the predominant reason cited by companies for increased costs, alongside reports of higher wage rates. Service sector costs rose at the fastest rate since January 2023. In contrast, manufacturing input price inflation cooled to the lowest since February but remained well above the average seen over the past three years.

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.

Australia starts to slide back into recession

 This is a chart of S&P Global's Australian manufacturing PMI.   

This kind of index is a diffusion index, i.e., it measures the percentage rising over the previous month.   At 50%, half are rising and half falling, which I call the "recession line".   The PMI has just dipped below 50%, on its way down.

The services PMI (October data not yet released) is still above 50, but it has been trending down.  The unemployment rate recently spiked up.  And the Reserve Bank of Australia is paralysed with terror about a slight rise in underlying inflation and won't cut rates.  By the time they do, it will be too late to prevent recession.

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]

Europe's economy on the mend

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.