World economy continues to recover

 S&P Global has released the provisional ("flash") estimates of the PMI indices for May.  The PMI indices are among the earliest data points available for the state of the economy.  The survey asks whether sales, employment, orders, etc are up or down on last month, but not by how much.  S&P Global then produces country indices for manufacturing and non-manufacturing/services.

I take these time series, extreme adjust them, and add them together, each weighted by that country's weight in world GDP (using purchasing power parity, or PPP, exchange rates to value national currency real GDP). 

The Big 5 are: the USA, the UK, the Euro Zone (European countries which use the euro currency), Japan and India.   The big 8 adds China, Brazil, and Russia to this calculation.

The chart below shows the Big 5 and the Big 8 GDP-weighted PMI averages, with manufacturing and service PMIs averaged (= "whole economy").  Since we don't have "flash" PMI estimates for China, Brazil and Russia, Big 8 PMI is only available to April.

Clearly, the world economy is accelerating.  Not only is the Big 5 PMI above the 50% "recession line" indicating that the economy is advancing, but it is also rising, i.e., the economy is accelerating.

The markets' conclusion that interest rates are likely to fall more slowly is correct.  And it is also likely that inflation will fall more slowly, too.

World economy troughing?

 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.

Big 4 PMI flat in December

The extreme-adjusted GDP-weighted average of the provisional ("flash") PMI for the "big 4" (US, Euro zone, UK & Japan) for December was down slightly on November's number.   In the chart below it is compared to OECD GDP, and not world GDP, because the big 4 PMI calculation does not include Russia, China, India and Brazil, for which "flash" estimates are not released.  The estimates were released unusually early because of the Christmas holidays.

The chart suggests that the QoQ (quarter-on-quarter) percentage change for OECD GDP will remain low for Q3 and Q4 of this year. (Q3 and Q4 data have not yet been released)

GDP in the US is picking up, despite the Fed's increase in the fed funds rate over the last year, because of Federal deficit spending in response to the "IRA".   In Europe, interest rates have also gone up dramatically, but there has been no big jump in deficit spending by governments, so growth has been much weaker.  Moreover, while the Fed has signalled that it will cut rates in 2024, the ECB (European Central Bank) and the BoE (Bank of England) have strongly hinted that they will not.  An interesting divergence.

Big 4 prolly still sliding into recession

 The average PMI for the big 4 economies (US, UK, Japan, Euro zone) rose fractionally in September (provisional data).  The big blip caused by "revenge spending" on services after the Covid lockdowns is over, but, on the other hand, the PMI average isn't plummeting.   The chart below shows the GDP-weighted averages of the manufacturing and services PMIs, for the big 4 and the big 8. (The big 8 is the big 4 plus China, India Russia and Brazil, and we won't have their PMIs for another 10 days)

Because monetary policy works with a lag, the record collapse in money supply and the 40-year record rise in interest rates prolly hasn't taken full effect yet.  Services have been holding up economies, and in the USA, the fiscal sugar-hit of the so-called "Inflation Reduction Act" also has something to do with the surprising resilience of the US economy.  All the same, both Europe and the UK  are both clearly slipping deeper into recession, even if the US isn't---yet.

Big 4 PMI slumps in August

 The preliminary ("flash") average PMI for the Big 4 economies (the US, UK, Euro zone & Japan, together representing 48% of the world economy) fell again in August.  This is the GDP-weighted average PMI for services and manufacturing, and each time series is extreme-adjusted before the average is calculated.

It's clear that the mini rebound or "blip" caused by "revenge spending" driving up services PMIs is over.  

The longer term negative forces (50-year record declines in real money supply; the largest and fastest rise in central bank discount rates in 40 years; and the consequent credit crunch) are driving the world economy down.  The service sector rebound held those forces back for a few months.  That's stopped.

Share markets were pleased that the "flash" PMIs were weak, because that meant that Central Banks might be less likely to raise rates.  But maybe it's time they started worrying about the risk of a recession, potentially a deep one, even with the big deficit spending from Biden's Inflation Reduction Act.

Big 4 PMI slumps

 "Flash"estimates are produced by S&P Global for just 4 of the "Big 8"economies:  The USA, Japan, Euro Area, and the UK.

The chart below shows the GDP-weighted average of the whole-economy PMIs for these economies/regions.   (Extreme-adjusted, latest observation July 2023)

The "blip"is over, and even with services included, the big 4 economies are slumping.  

Big 4 PMI

 Sliding to new lows (extreme-adjusted).  The Big 4 comprises the USA, the UK, the Euro Zone, and Japan, which together make up ±50% of the world economy.  The latest month is provisional ("flash").  The largest economy left out is China, for which there is no "flash" PMI.  

More evidence for fizzling uptick

I've talked before about how my fibre index is a good indicator of world economy activity.  Yeah, it surprised me too.

We've just had the preliminary PMI data for 4 of the big 8 economies/regions:  the US, the UK, Japan and the Euro zone, and the updated average is shown in the chart below.  It's interesting that even the mini cycles are similar.  For example, the world economy was starting to pick up in late 2019, which was aborted when the Covid Crash hit.  And fibre prices faithfully pick up that abortive little uptick.

Right now, like the manufacturing PMI (and "flash" services, too, which look to have peaked), fibre prices are falling.

Big 4 PMI drops a little

 After 2 months of a small rise in the Big 4's GDP-weighted PMI, it fell back in March ("flash" estimates).  The Big 4 is the USA, Japan, Euro zone and the UK, but doesn't include China, because no "flash" estimate for China is produced.  We'll have to wait a week for final figures as well as for PMIs for China, Russia, India and Brazil.  In the meantime, the estimates for the Big 4 suggest that the Big 8 PMI will likely tick lower in March.

I should point out that the services PMIs rose in March,   I used not to follow them, but during the Covid crash, it was services which were hard hit.  Normally, the services turning points tend to follow manufacturing's, with lower cyclicality.  But so many economic indicators have become unreliable since Covid, because it affected labour markets, supply chains, and business and consumer confidence.  Interesting times.

Click on chart to see clearer image

Big 4 PMI slides again in November

 S&P Global (who took over IHS Markit, and now produces the PMI surveys) releases "flash" (provisional) PMIs for just 4 of the big economies: The USA, UK, Euro Zone, and Japan.  But the correlation of the "Big 4" with the "Big 8" is (no surprise) close.  

Both series are calculated from the extreme-adjusted series for each country, weighted by PPP GDP.  The "Big 8" PMI crossed the 50% "recession line" in October, and so will likely have retreated further in November.  Note that extreme-adjustment sharply attenuates the downward spike in GDP during the Covid Crash in early 2020.  These indices are now lower than they were during the Euro crisis in 2012.

Big 4 'flash' PMI falls in June

 My 'Big 4' average PMI is composed of GDP-weighted, extreme-adjusted PMIs of the US, the UK, Europe, and Japan.  Together, these make up 48% of world GDP.  The other 4 countries which are included in the  'Big 8', don't have 'flash' (= preliminary)  estimates for the latest month, but the 'Big 4' do.   The latest data for the 'Big 4' are for June ― the 'flash' estimates ― but for the 'Big 8', data are only available until May.

Since revisions of the component time series, if they are random, are likely to offset each other, that means that the 'Big 4' PMI has indeed fallen in June, so it seems very likely that the world economy is continuing to slow.  Note that a reading above 50 for the PMI means that the economy is still expanding, but the steady fall in how much it is above 50 indicates that it is expanding more slowly.   If we just extrapolate the trend lines, the 'Big 4' and 'Big 8' PMIs are likely to cross the 50% line by the end of this year, marking the point at which the world goes into recession.

"Flash" world PMI falls again

The people who produce the PMI (Purchasing Manager Indices) for most world economies also release a "flash" or preliminary index for a few countries.  These are based on partial data and are usually revised a little when full data become available.  However, the revisions for individual countries will tend to offset each other, if they are random.  To complement a 'Big 8' weighted-average PMI, I have also created a 'Big 4' average PMI  for the countries for which a "flash" PMI is released.  These are:  the USA, Japan, Europe and the UK.   The biggest missing country is China,  which is in the 'Big 8' weighted index, but for which a "flash" PMI  is not released.  The indices are weighted by PPP  (purchasing power parity) GDP.  

A comparison of the two aggregates is shown below.

The 'Big 4' PMI fell in May.  Since PMIs for China (covid lockdown) and Russia (war/sanctions) are also likely to have retreated over the month, the 'Big 8' PMI  prolly also fell in May.  This will take the May datum well below the end 2017 peak.  Growth is definitely slowing, and rising central bank discount rates will only intensify the slowdown.  The probability of a 2023 global recession keeps on rising.

World eco decline slows, just.

The average PMI for the big 3 economies for November ("flash" estimate) suggests that economic growth, though still negative, is no longer declining.  Since the PMI surveys ask respondents whether a particular factor of their business is up or down, but not by how much, its correlation with other economic indicators like industrial production (IP) or GDP is not perfect.  Because it's an "up or down" question, a PMI below 50 means that the majority of respondents have falling sales and production.  So though the US has rebounded, the rebound elsewhere is much weaker, and on average the big 3 economies are still slowing though not as fast as they were.

Source: My calculations
I haven't had the time to update IP recently, but the decline in the PMI is likely mirrored in IP

If we make an estimate for China's PMI for November (my automated forecasting program projects a small increase, which seems likely to me), a similar picture is given. 

Source: Various, my calculations, my graphics
Again, I haven't been estimating world IP for a couple of months.

The European recovery is likely to remain weak, because short term interest rates there are zero, leaving little room for manoeuvre.   QE (quantitative easing) is surely ineffective when long-term bond yields are already below zero, which they are for most EU countries.  If the bonds bought by the ECB are paid for with "printed" money, then it will drive the Euro down, which will provide some stimulus via the foreign sector.  That will annoy Trump.  Meanwhile, an obvious avenue of stimulus, deficit spending, is closed off by big deficits in weaker economies and intransigence in Germany.  So I don't expect a strong rebound in Europe.  Similar considerations apply to Japan, which also has short-term rates at zero and negative bond yields. 

China is being adversely affected by the US/China trade war, but it at least doesn't have ideological objections to deficit spending, though it faces serious structural issues which will limit its growth rebound.

So, to sum up:

• World growth is no longer falling
• US recovery strongest in the majors
• World growth in 2020 likely to be sluggish 
• Europe weakest among big 4