There was a slight uptick in the big-5 whole economy PMI in January (provisional data), but the trend remains down. All three PMIs remain above the 50% recession line, but not by a lot. Implication: stagnation continues. We'll get a slightly better picture when S&P Global releases PMIs for Brazil, Russia and China. The Big-5 PMI is the GDP-weighted average of PMIs for the USA, the UK, the eurozone, Japan and India.
The big 5 PMI index is a GDP-weighted average of the US, UK, Japan, India and Euro-zone PMIs. The big 5 make up just over 50% of the world economy using purchasing-power parity for the currency conversion.
The whole-economy PMI is an unweighted average of the manufacturing and the services PMIs. It should roughly parallel GDP growth. The match isn't perfect, but it's usable. The PMI tends to lead GDP, partly because it's a diffusion (momentum) index.
The index has levelled off, with most of this decline due to weakness in the big-5 manufacturing index, except for the UK. Even the Euro zone, which had had a strong recovery in manufacturing, is now sagging, presumably a consequence of Trump's trade war.
Services are holding up better, with the result that over the last couple of months, the average of the two has been flat.
The whole-economy PMI is above the 50% recession line, which suggests the economy is still expanding, though not rapidly. However, the expansion will prolly be enough to slow interest rate cuts.
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| Click on chart to see it more clearly "Weighted average" means weighted by PPP GDP. |
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.
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| The first fall for services, manufacturing and the average in six months |
Here are the charts for each country/zone individually:
The US:
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| 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:
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| 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:
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| The UK is in trouble. The average PMI is below the 50% "recession line", and it's falling. |
Japan:
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| Note how it is just services which are holding up the Japanese economy. Manufacturing is sliding. |
India:
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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]
The average for the "flash" (provisional) PMIs for the Big 5 rose sharply in August. The biggest rises were in the USA and India. (The Big 5 are: the USA, the UK, the Euro Area, Japan and India, and they together represent 53% of world GDP, using PPP GDP. )
I confess I am surprised that the US average PMI rose so much.
S&P Global comments:
“Companies across both manufacturing and services are reporting stronger demand conditions, but are struggling to meet sales growth, causing backlogs of work to rise at a pace not seen since the pandemic-related capacity constraints recorded in early 2022. Stock building of finished goods has also risen at a survey record pace, linked in part to worries over future supply conditions.
“While this upturn in demand has fueled a surge in hiring, it has also bolstered firms’ pricing power. Companies have consequently passed tariff-related cost increases through to customers in increasing numbers, indicating that inflation pressures are now at their highest for three years.
“The resulting rise in selling prices for goods and services suggests that consumer price inflation will rise further above the Fed’s 2% target in the coming months. Indeed, combined with the upturn in business activity and hiring, the rise in prices signaled by the survey puts the PMI data more into rate hiking, rather than cutting, territory according to the historical relationship between these economic indicators and FOMC policy changes.”
Interesting times. The ISM indices, an alternative measure to the PMI fell last month, whereas the PMI rose (the data were revised up).
Trump wants to take control of the Fed, to ram through interest rate cuts. But if rates are cut as inflation is rising, instead of being a transitory effect of higher prices, inflation will become embedded in the system, and that will be bad for share and bond markets.
The ramifications are too complicated to explain in a short note like this, but I have to say, I remain very cautious about US and global share markets.
The big 5 average PMI has been trending sideways for 9 months now, but that apparent trend conceals the beginnings of an upturn a couple of months ago, which ended with the Trump tariffs shenanigans. The averages are weighted by GDP as measured by purchasing power parity (PPP) and each time series has been extreme-adjusted to remove outliers before being calculated. What is interesting is that the services and manufacturing big 5 PMIs are moving closer together, which on the whole has been the historical pattern. There is still too much smoke and dust to determine whether a new recession has begun. Certainly the tariffs are a zero-sum game at best, with output and spending being switched to the US, but at worst the jump in uncertainty would imply a net contraction, as spending and investment are postponed. We shall see.
The big 5 economies are: the USA, the Euro zone, the UK, Japan and India, and together they make up about 52% of world PPP GDP.
The "flash" (provisional) PMIs for the big 5 economies (US, UK, Euro Area, India and Japan; there is no "flash" PMI for China) rose a little in March. Together, they make up just over half of world GDP. Each component has been extreme-adjusted to remove outliers. Europe is recovering (see lower chart), Japan is weakening, and the US is mixed (we don't know yet just how much Trump's trade wars will reduce US economic activity). So, on the evidence so far, the world economy is continuing to improve, slowly.
Canada and Mexico are both falling into recession. How much their slowdown will impact the USA remains to be seen. And Europe's embrace of deficit spending and defence spending using European (not US!) suppliers, Europe's growth will surprise on the up-side.
As I mentioned, the US PMI for services unexpectedly fell in February, probably on the public's fears about Trump's policies. This meant that even though the big 5 manufacturing PMI rose, the average of manufacturing and services was flat.
The "big 5" are: the USA, Euro Area (countries using the Euro as a currency), the UK, India and Japan. Together, they make up 53% of the world economy.
The big 5 PMI rose sharply in December, mostly because of a jump in the USA's services component, but the other components also ticked up. Remember, these are "flash" estimates, and could be revised. The big 5 PMI covers economies representing just over 50% of world GDP, and is a GDP-weighted average of the USA, the Euro zone (EA), UK, Japan and India. "Flash" estimates for China, Brazil and Russia are not released. As usual, to calculate the big 5 totals, each country's PMI for manufacturing and for services is extreme-adjusted, and then weighted by that country's GDP, before being added up. The total (i.e., average) PMI for the big 5 correlates well with GDP for the these countries. If the index is above 50%, GDP is expanding, and the higher it is above 50%, the faster it is expanding.
This chart shows my calculations for the big 5 whole-economy PMIs. "Whole-economy" means the unweighted average of manufacturing and services PMIs; "big 5" means the GDP-weighted averages of the USA, UK, Japan, Euro Zone and India, about 53% of world GDP; and each individual PMI has been extreme-adjusted before they were added together. Since PMIs are a diffusion index, i.e., they measure whether sales, employment, etc., are up or down on the previous month, 50% represents the "recession line". If the PMI is below 50%, more than half of all component series are falling, while the reverse is true if it's above 50%.
In November, the big 5 average PMI was 50.9, fractionally down from October's 51. Remember that these November data are "flash", i.e., provisional estimates, so will most likely be slightly revised. However, in the past, revisions have been small, and in different directions for different PMI indices, so that revisions for the multi-country averages have tended to cancel out.
Conclusion: the world economy is not in recession, but it's only growing slowly, with no signs of an imminent pick-up. Within that, Europe is still in recession, the UK has gone back into recession after a brief blip, but the US is picking up. No doubt falling interest rates globally will boost the world economy, but the impact of interest rate changes on the economy tends to lag, by at least a year. I'd be surprised to see accelerating world growth before mid-2025. I'll keep you posted.
The extreme-adjusted GDP-weighted PMIs for the Big 5 economies (US, Euro zone, UK, India and Japan, accounting for 53% of world GDP) slid again in September. These are "flash", i.e. provisional, data, but in the past, although PMIs for individual countries do get revised, the revisions to the flash data Big 5 and Big 8 totals are minor.
The green line represents the "whole-economy" PMI, which is roughly correlated with Big 5 GDP growth. As you can see, this level of whole economy PMI is consistent with sluggish growth, but not a recession--in other words, a "soft landing". Central Banks have already started the falling interest rate cycle (bottom chart), and though the economy takes time to respond to falling interest rates, we can expect that growth will pick up in 2025, though I do not expect a rapid recovery.
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| The purple line shows the GDP-weighted average of CB discount rates, covering 72% of world GDP. |
The big 5 represent +- 53% of the world's economy. They are: the USA, the Euro Area (EA; i.e., the European countries which use the Euro currency), India, the UK and Japan. These are the countries/regions for which S&P Global releases "flash" (= provisional) PMI data for the current month, for both services and manufacturing. These PMI times series have a good (though not perfect) correlation with overall economic indicators such as GDP, industrial production, employment, etc.
Once again, it is services rather than manufacturing which is holding the global economy up. However, there are no signs of an economic recession, and since the interest rate cycle has peaked, from now on, growth will be accelerating, though I expect the upturn to be gradual at first. The line to look at is the green one. Note that I extreme-adjust the PMI for each sector, for each country, before I calculate the global average.
The "flash" (preliminary) PMIs for 5 (i.e., for the USA, Euro Area, Japan, India and the UK) of the big 8 have been released. The GDP-weighted weighted average of the total for manufacturing and services fell a little in July.
Is this the beginning of an economic downturn? No. But as I've said before, the recovery could be sluggish:
Mostly because of a decline in the euro zone.
Is this the beginning of a downturn? No, but as I warned last month, the recovery in world economic activity will be sluggish. (The big 5 are the USA, Europe, India, Japan and the UK, and they together represent 52% of the world economy.) PMI data for the rest of the world will be released over the next week.
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.
