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

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.

US unemployment rate jumps

The BLS (Bureau of Labour Statistics) has produced new estimates for labour market data for November.  Because of the government close-down, there are no October numbers, so I have interpolated the gap.

This is the unemployment rate:

Observe how the unemployment was rising (in other words, the economy was weakening), then started to fall in the second half of 2024, before rebounding again after January.  The last time it was this high was in 2021 as the economy recovered from Covid.

If you take the change in the unemployment rate, it is strongly negatively correlated with the state of the economy: when the economy advances, the unemployment rate falls, and vice versa.  The chart below shows the change in the unemployment rate, inverted, so the line in the chart falls when unemployment is worsening, and rises when it is improving.  I have done this so it is consistent with the direction the overall economy is moving in.  

So, through 2023 and the first half of 2024, we can deduce that the economy was deteriorating, then it started to improve, before once again worsening after Trump's tariff débâcle. 

How does this look compared with a completely different indicator of the economy?  I have used the whole-economy ISM (service plus manufacturing) as a good proxy to the state of the economy, and put the change in the unemployment rate and the ISM on the same chart.   Note how the whole-economy ISM slightly leads the change in the unemployment rate.

The ISM has had a small rebound since June, but looks as if it might have peaked.  This means that the change in the unemployment rate might also have peaked, temporarily.  That does not mean that the unemployment rate will start falling--it may well just go sideways for a couple of months.

Indicator after indicator gives us the same pattern:  a nascent recovery as the economy shrugs off the previous rise in interest rates, and starts to respond to their fall; a recovery which aborts as Trump's tariff mess cuts economic activity and reduces confidence.

The chart below shows this pattern too.  It is my private sector data index, which I constructed when official government data were not being produced, but which I have found useful even now that data are being made available again.  The chart shows the year-on-year change in this index.  Note the peak in late 2024, and the slump since then.

The data are unambiguous:  the US economy is slowing.  Whether it goes back into recession isn't clear, but at the least there will be stagnation.   The markets are convinced that the Fed will cut rates again, which I think is very likely.  However, this market belief is not leading to falling bond yields and rising stock markets as it normally would, but instead to a falling US dollar and surging precious metal (gold, silver, platinum and palladium) prices, suggesting that the markets also think that inflation is going to be trending up.  In a word: stagflation.

US stagflation?

 I've talked before about my composite index made up of private sector time series.   The aim was to provide some sort of indicator while official government data were not being produced due to the shut-down.

Now that the shut-down is over, the BLS has released payrolls data for September, and I've also updated my index with NFIB (small business) components.  The next update will be in the first week of December, when more of the component series are released.

The chart below shows my index versus the 3-month change in non-agricultural payrolls.   I have only shown the data from the beginning of 2022 onwards, to exclude the huge swings caused by Covid.

I wouldn't be surprised if payrolls continue to barely grow, or even go negative.  This is consistent with the steady rise in the unemployment rate.  Will this be combined with rising inflation, too?  I suspect the answer is yes.  That's called "stagflation", and the public doesn't like it (bad for Trump and the Republicans); the markets don't like it (bad news when share markets are so over-extended) and it makes the Fed's job very difficult (easier to make a mistake).

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.

Private sector data confirm US slowdown

Since the government isn't publishing any data, I decided to create a composite index of what time series we do have from the private sector. It is composed of the whole economy ISM and PMI indices, the University of Michigan's consumer sentiment index, the logistics managers' index, ADP job changes and Challenger job losses (inverted).

The pattern is familiar--I've talked about it before.  A nascent recovery through 2024 in response to rate cuts stops dead in its tracks when Trump starts his tariff follies, then rallies a little because the tariff effects are lagged, but starts declining again as tariffs (and deportations and welfare cuts and healthcare) really start to bite.

This indicator suggests that, at best, the economy is somewhat worse this year than last.  But if current trends continue, it will be substantially weaker over the next few months, year on year.  

Can Fed rate cuts help?  Yes, eventually.  But economies lag changes in interest rates by 12 to 18 months.  Current rate cuts won't undo the damage caused by Trump's policies until late 2026.

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.

Labour markets point to recession

 On Friday, the US labour market statistics for August were released.   The data confirm my bearish view of US economic growth.

The chart below shows the change in non-agricultural payrolls over 3 months, per month.  Growth in employment fell steadily until mid-2024 (a lagged response to the rise in the Fed Funds rates in 2023), then began to rise.  A renewed (global) recovery had begun.  Then Trump's tariffs stopped this recovery in its tracks.   Employment is barely growing now, and will prolly go negative in the next couple of months.

 

A similar story is revealed by the unemployment rate.   Observe how the unemployment rate rose steadily, but stopped rising in mid-24, as the economy re-accelerated, and then started to fall, reaching a low point in January 2025.  Since then, it's been rising.

And this chart shows the dilemma the Fed faces.  The data come from the ISM (Institute of Supply Management) surveys.   They show the average for manufacturing and services indices for prices paid, and employment.  Notice how the average employment index, like the payrolls data, started to rise in mid-24, peaked in January 2025, and has been falling since.  It's now below the 50% level, which means that the majority of respondents are cutting employment.

The other line on the chart is the "prices paid" index, again, an average of the manufacturing and services ISM indices.  See how it's jumped since January 2025?   The "prices paid" data tend to lead consumer price inflation, so the rise in CPI inflation that will prolly result from the jump in prices manufacturing and services industries are paying will only start showing up in consumer prices from now on.

Rising inflation will lead to falling real incomes, which, combined with increasing uncertainty, will mean that consumer spending (~70% of GDP) will falter.   Consumers already judge that jobs are "harder to find" (from the Conference Board survey; see below), and they're right.  But combine a faltering labour market with falling real incomes, and it's hard to see how this gathering storm will be stopped without the Fed cutting the Fed funds rate.

Will the Fed "look through" the jump in inflation, arguing that it's transitory?  To me, it's not clear that the inflation increase will be short-lived.  Companies will take advantage of the huge tariff increases to up their own prices, even as the prices they pay will also soar.   Plus we're seeing plenty of anecdotal evidence that food prices are jumping, because they are picked and packed by immigrant labour.  There is no sign that Trump or his lackeys will reverse policy.  

But then I'm not in any way linked to the Fed.  I will say that the senior Fed economists and analysts I have met over the years have been formidably intelligent and well-educated.  (Though how much longer that will last is unclear).   The costs of a mistaken forecast will be significant.   If inflation is transitory, cutting the Fed funds rate will be the right policy.  If not, the Fed risks higher inflation becoming embedded in the economy.

The markets are convinced the Fed will cut rates later this month.  Bond yields have fallen, and the dollar is taking a hammering.   But equities have been more cautious.  Shares are substantially overvalued, and the rise in share markets has been primarily driven by AI/tech companies.   I deeply mistrust the AI bubble.  It reminds me of the dot com bubble, and when that burst, there followed a 50% decline in the S&P 500 over the next 2 years.  The combination of stagflation and overvaluation could be lethal for shares.

Once again, a recovery from mid-2024 is derailed by Trump's tariffs in 2025

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.

Business confidence slides

 This is the average of US and OECD Europe (which excludes a few European countries, the most notable of which is Russia), which represents roughly half the world's GDP.

Note how it had started to rise, and then as Trump's tariffs impacted, it fell.  Business confidence tends to lead the cycle.  

Of course, any indicator may change direction, but if this downtrend continues, it will signal at best sluggish growth, at worst recession.

I'm busy extending the business confidence series in my data banks, and will add more countries to this calculation to get a more representative picture of global trends.

I need to work on my font sizes in my charts too!

I'll keep you posted.

The Jaws of Stagflation

 Stagflation is the situation in an economy when inflation is high and growth low.  The last time we saw widespread stagflation  was in the 70s.  The chart below shows the average of the ISM manufacturing and service indices for prices paid and employment.  The prices paid index tends to lead consumer price inflation, but the employment index more or less coincides with the official employment numbers.

As is obvious, since January, the prices paid index has soared, while the employment index has declined.  What this suggests is that inflation will be picking up, while employment is likely to decline.  Note how the employment index had started to rise, only to start falling from February onwards, paralleling the pattern displayed by other indicators.

The consequences of Trump's tariff follies are starting to become apparent.

By the way, stagflation is not very good for bond or share prices.  I am quite bearish about both markets.

World inflation sticky downwards

 By which I mean that it's stopped falling.

My calculations; big 8 GDP-weighted

The number of countries with inflation above 4% has risen, as has the number above 6% and 8%.  This has prob'ly been driven by a rising dollar, which increases the price of their imports.  The implication is that these countries will likely have to raise interest rates or otherwise tighten policy to slow their inflation.  And they may also, therefore, end up defaulting on their debts.  At the moment, though, the median world central bank rate is still falling.

Meantime, US inflation has stopped falling, and Trump's tariffs and his expulsion of immigrants will drive up US inflation rates.  We may end up with "stagflation", a situation where growth is low but inflation is high, not good for markets or politics.