This chart shows the change over six months in China's volume of industrial production. The recovery which began in mid-2024 has aborted, probably because of Trump's tariffs. Domestic policy missteps didn't help either. The usual route China has taken in the past, namely, to overstimulate property development, is closed because there is a huge oversupply of housing (from previous stimuli), and house prices are still falling.
I presume the government will step up stimulus soon.
As usual, the line to watch is the thick green one.
To recap:
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.
Three charts showing some time series from the US economy.
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| A low quit rate suggests workers have little confidence that they'll get a new job. Low vacancies show they're right. |
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| Jobs "hard to fill" from the NFIB small business survey "Jobs plentiful" from the Conference Board consumer confidence survey |
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| Consumer sentiment from the University of Michigan Consumer confidence from the Conference Board |
The BLS labour market data for December were released overnight (my time zone).
Payrolls continue to slide.
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| The ADP data only cover the private sector |
The change in the unemployment rate over 6 months correlates well with the cycle. I've plotted it inverted, as unemployment goes up when the economy is weak, and down when it's strong. So far, it looks as if it's still weakening, i.e., the trend in unemployment is still up.
Has it turned up for this cycle? Perhaps. But uncertainty is always a killer for economic growth. If you have lots of questions about economic and political policy, you spend less, you hire fewer people, you don't invest in plant and equipment, and you postpone decisions. There's nothing to suggest that this environment has changed. Who knows where tariffs are going? Who knows just how badly consumer spending will be affected by the removal of health-care subsidies? Who knows how much inflation will rise because of tariffs and the deportation of agricultural workers? Caution, right now, is good policy. Incidentally, that also implies that labour lay-offs will also be limited. Firms won't hire or fire. (Exception: small companies, which right now are firing) The time to panic will be if/when lay-offs start rising.
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.
Another window into what's really happening in the economy is the relatively new logistics managers index. The chart below shows a three-month moving average of the logistics index compared with the average of the extreme-adjusted manufacturing PMI and ISM. The logistics index has been falling since February.
The conclusions are obvious.
Australia's official inflation rate fell in November. By the way, our CPI data are now monthly. Previously, the official indices were quarterly, because not all components were sampled monthly --- the monthly data were subsidiary to the quarterly data, and subject to revision. Now it's the other way round, with the quarterly data now derived from the monthly series, bringing Oz in line with most other countries.
The slight fall in inflation led, of course, to the market gurus postponing their projected rise in the cash rate. I wasn't convinced in my last report that the RBA needs to raise rates, and I remain unconvinced now -- see the charts below the inflation chart. Although household spending is recovering, the others are all weak. And a composite index of these five indicators, shows a post-recession recovery which has faltered. Raising the cash rate would be a bad idea.
The only factor pointing towards a strong Ozzie recovery is metal prices, which are surging. Coal and oil and iron ore are not (coal and iron ore are our major mineral exports), which is significant, because metals and minerals do tend to move in tandem during commodity booms. The boom is confined to lithium, nickel, base metals and precious metals. How sustainable is this oddly concentrated commodity price run? How much is due to heightened risk from Trump and consequent hedging by Central Banks and investors? One is led to suspect this because world growth is not exactly robust. And since the oil price is falling*, not rising, the effect of the commodity cycle on inflation here and elsewhere, will be limited. The Reserve Bank is no doubt thinking hard about all this.
However, even though I think the RBA shouldn't raise the cash rate, it certainly shouldn't cut it, until we have greater clarity on commodities.
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| The unemployment rate continues to drift higher |
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| Job ads stopped falling at the end of the recession, but they have resumed their decline |
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| Real household spending is picking up |
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| A composite index of the 5 indicators from the charts above suggests a post-recession rebound, followed by stagnation. |
* The most likely reason oil prices aren't rising is because the rise in EV sales and ownership in China mostly, but also elsewhere, is reducing oil demand.
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.
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.
This has been a reliable leading indicator of the economy for nearly 60 years (see So, Happy Campers, a recession?) Heavy truck sales are now almost as weak as during the Covid Crash or the 2000 recession, and clearly heading south.
This shows the time series over just the last 4 years. Note again the pattern which keeps on emerging---an incipient rise/levelling off at the end of 2024, and a subsequent renewed downturn in 2025.
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.
This chart shows the six-month rate of change, at annual rates, for my index of world industrial production. It's up to October. Again, a simple pattern. Recovery as the impact of rising interest rates diminishes, and is succeeded by the stimulus from falling interest rates. And then growth peaks and slides sharply.
Trump is driving not just the US, but the global economy into a slowdown at best and a recession at worst.
China has just released its official year-on-year industrial production growth rate for November (4.8%, down from a peak of 7.7 % in March). November's data for US and EA (Euro Area*) industrial production are only available through October 2025. I have a function which estimates additional month(s) of data for a time series. It calculates the next month via three different techniques and uses the average of these three values as the forecast. I have thus been able to estimate an average for industrial production for China, the US and the Euro Area through November.
The chart plots the 6-month rate of change at annual rates in the unweighted average. These are the three largest economies/economic zones in the world, and allowing for Chinese overestimation of GDP, are roughly equal in size. The 6-month rate of change is slowing for all three zones: China peaked in March 2025, and has been decelerating since; the US peaked in June this year; and the EA in April this year.
Growth for the average of the 3 is still positive, just, but the trend is down. Note again the pattern: an accelerating recovery in the world economy from Q4 2024, fizzling out as Trump's tariffs disrupt economies and increase uncertainty.
How low can it go? Well, there is the powerful (lagged) influence of falling interest rates, which should be holding the world economy up, offset by the more immediate impact of the increased uncertainty and trade reductions of the tariff war. So we may see stagnation rather than recession.
The latest data from Challenger show that layoffs fell in November, after a spike in October. These data are not seasonally adjusted, and also show large month to month "spikes". So I have fitted a centred 5-month moving average to the data. This moving average (see chart below) points to a big jump in layoffs after Trump's election, an improvement up to July and deterioration since then. I have estimated a provisional seasonally-adjusted version of the Challenger layoff data, and it produces the same pattern. [Why not a final seasonally adjusted series? Because I want to run some statistical tests, to confirm seasonality, and it's late at night, so that will have to wait for tomorrow. Meanwhile .....]
If you look at the average of the unadjusted data over the last 12 months, the last time layoffs were this high was during the Covid Crash, and the time before that was during the GFC in 2009!
Don't be misled by one month's improvement. The trend is still bad: layoffs are rising, despite the apparent drop in November.
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| Note inverted scale for job cuts |
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.
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
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.
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.
A very clear slowdown. (See China's manufacturing PMI heads south)
Europe is (more or less) still recovering, though I would not describe it as a runaway boom.
But the US is sliding. Plus, China's slowdown is forcing the country to export deflation as her industry tries to survive the domestic crunch.
Quelle pagaille ! Trump's tariff tango is endangering the world economy. The world's two largest economies are at best stagnating. And the trends don't look good.
[Technical note: Most Chinese economic time series are affected by the peripatetic Chinese New Year, which can be in January or February. The NBS (National Bureau of Statistics) often does not publish data for January and February, or publishes an average for the two months.
Seasonally adjusting these time series is difficult. This is complicated further by China's publishing industrial production as a year-on-year change, not as an index. Estimating an index was made more tricky by successive Covid lockdowns. I have found that my seasonal adjustment program was not completely removing seasonality because of these problems.
So I have adjusted somewhat the method of calculation for Chinese IP, by seasonally adjusting my estimated IP index before and after covid separately. In addition, I have fitted a centred 12-month moving average to the resulting time series. By definition, a 12-month moving average contains no seasonality. The rate of change I show is calculated from the average of my seasonally adjusted index and its 12-month centred moving average. I hope this still leaves enough variation to detect change in business cycle trends, without being misled by spurious seasonality.]
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.
