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.
Most indicators are pointing down, but a couple are rising. The average of the Empire State and Philly Fed indicators is trending up after falling since the beginning of the year (Trump's tariff pagaille). It's true, this only covers the NE United States, so isn't definitive. However, it fits well with the average of the two national surveys by the ISM (Institute of Supply Management) and the PMI (Purchasing managers' index, from S&P Global):
We'll see.
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.
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| Once again, a recovery from mid-2024 is derailed by Trump's tariffs in 2025 |
Yesterday, I posted a piece about global business confidence. I am in the process of expanding and altering my databases, and adding more business and consumer confidence time series as well as revising my time series processing programs.
The time series I plotted was a composite of two different business confidence indicators, one for the USA and one for OECD Europe as a whole.
I've since added some more business confidence series, which has allowed me to calculate business confidence indicators covering more of the world.
The chart below shows G7 and G11 industrial production and business confidence.
20 years ago, the G7 (the USA, the UK, Germany, France, Italy, Japan and Canada) were key to the world economy and served as a good proxy for it. But other countries grew fast, and we needed to take them into account. So we got the G11: the original G7 plus China, India, Russia and Brazil. Together they make up roughly 2/3rds of world GDP. Also on the chart is G11 business confidence. (All the indicators are my calculations, using weights derived from purchasing power parity GDPs.)
As can be seen, G7 and G11 industrial production move in similar cyclical patterns (which is what the deviation from moving trend is designed to portray) but in fact the G11 growth rate has been much higher than the G7. Over the last 20 years, the G11 growth rate has been a full percentage point per annum higher than the G7, and over the last couple of years, the gap has been even higher.
What's happening now is that G11 business confidence is falling, while G11 industrial production is picking up steam, because China is recovering, even while G7 IP is slowing. Clearly, business confidence tends to lead the cycle, turning down before the economy does, and also up before it does too, though the lead at the top of the cycle is longer than at the bottom. So this divergence now between G11 IP and business confidence is very interesting. The business cycle gave a false signal in 2004, and so it's not infallible. But remember, it leads the cycle, by between 6 months and a year, so its decline is yet to be fully reflected in economic activity.
We are, I think, at a cusp, and conventional indicators might not work too well, because the uncertainty and disruption caused by Trump's tariff follies are unique in my long professional experience. Logic leads me to believe that the combination of extreme uncertainty and big blockages to world trade will lead to rising inflation in the US, and lower growth everywhere. But we won't know for a few more months, by when it will be too late. In the meantime, the big question is how much US tariffs will damage world growth outside the US, especially in China. I am following the latest releases of economic and financial data in a way I haven't for many years.
In response to the question I pose in my title for this post, the answer is most likely yes.
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| Click on the chart to enlarge it. |
This chart is prolly very familiar to you, as I've shown it often before. It shows the extreme-adjusted ISM and PMI surveys for manufacturing, as well as their average. As I've mentioned before, if you have tow time series which are (statistically) independent, their average will have a smaller "error" than each one individually. Extreme-adjustment removes statistical outliers, especially big "spikes" up or down, such as during and after Covid.
As ever, the line to watch is the thick green one.
The world, including the USA, had begun a new upturn, as the effect of tightening policy by the world's Central Banks had started to fade. That process, in the US at least, has reversed. And it's just the beginning. Note that the average of the two surveys (the green line) has fallen back below the 50% "recession line".
For the most part, PMIs tend to move more or less in line with business confidence. This particular business confidence survey just covers industry, like the PMI (there is also a services PMI, not shown). Like the PMI, the business confidence index is a weighted average of several survey results: production trends, order books, export order books, stocks, and production expectations. The PMI uses slightly different surveys, is taken at a different time of the month, and different weights, so one would expect to see some differences.
But the PMI is rising strongly and is almost above the 50% "recession line", while business confidence had started to rise, but fell sharply in June. So which should we believe? The PMI includes employment, whereas the business confidence index does not. But the employment subsector of the PMI also fell in June, though only slightly. So that can't explain the divergence.
Some other clues. Euro Area (countries which use the Euro currency) industrial production picked up over the last year to March, but fell in April, probably because of Trump's tariffs. The volume of retail sales in the Euro Area fell sharply in May, after recovering over previous months.
My perspective is that Europe has indeed started to recover, but the tariff mess has paused the recovery.
The EU makes up about the same percentage of world GDP as the US does, around 22%. If, as I think, the US goes into recession and the European recovery falters, a global recession will be inevitable.
This chart shows the Big 8 GDP-weighted PMIs for manufacturing and services. Just a reminder--the big 8 consists of the US, UK, EA (Euro zone), Japan, China, Russia, India and Brazil, and represents roughly 70% of the world economy. I have extreme-adjusted each series before I created the global averages.
Some points to note:
The small 15 weighted average PMI, which covers manufacturing only, historically tracks the big 8 quite closely. However, over the last few months, a big divergence has opened up, as small economies as a whole have slid, though some have done much worse than others. My small 15 make up 11.5% of the world economy, but there is some overlap with the big 8, since Belgium (0.58%) and Finland (0.18%) are members of the Euro Zone.
Finally, the GDP-weighted PMI for Asia (JP,CH,IN,ID,TW,KR,MY,TH) has plunged. Together, these countries make up +-28% of world GDP. Again, this is the PMI for manufacturing only.
The only bright spot: manufacturing in Europe is picking up. Will a nascent European recovery be sidelined by the trade war and its associated uncertainty? Perhaps not, given Europe's economic heft. And yet, the services PMI is declining.
My judgement is that the world is on the brink of recession.
I remain convinced that the US is slowing. Just how deep the downturn is, I cannot tell, because there are so many factors changing so rapidly. Trump's policies and policy shifts have damaged confidence and increased uncertainty, and there is no knowing when rational policy will be followed. In the meantime, all we have is the current data.
The chart below shows the unweighted average of the ISM manufacturing and services surveys, and I have been following it for more than 20 years for its insight into what is happening in the economy.
Note how the whole economy ISM had started to rise, but from February onwards has been falling. The start of the decline coincided with Trump's inauguration. This can be more clearly seen in the chart below, which shows the same data, but for a shorter period.
I'll keep you posted.
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.
I haven't updated my Australian coinciding index, which is designed to coincide with the business cycle, for a while now, for a variety of personal reasons, some small, some much larger. At any rate, I have just updated most of the Australian time series I monitor, and have calculated my coinciding and leading indices.
I thought I would just confirm that my coinciding index is still correlated with the Ozzie business cycle. To measure the business cycle, I use an average of real GDP and real GDE (gross domestic expenditure). For a commodity-based economy, GDE is a better guide to the business cycle than GDP, and is better capable of being influenced by monetary and fiscal policy.
I have expressed both time series (my index and the GDP/GDE average) relative to their moving trend.
As can be seen, my coinciding index follows the GDP/GDE average closely, though my coinciding index is much further below the GDP/GDE benchmark over the last year than (I suspect) it should be, which may be an artefact of the deviation from moving trend calculation. [See the second chart below.] Note that neither GDP nor GDE form part of my coinciding index because they are quarterly, and therefore published with a lag.
Will the Ozzie economy recover from now on? I suspect it will, but Trump's tariff shilly-shallying isn't just making it harder for business to plan ahead, it's also making it harder for economists to forecast! All I can do is monitor the data closely, which I will do. In the meantime, I believe that Australia has passed the lower turning point in the cycle, and although it won't be immune to Trump's idiocies, the recovery will be sustained.
The sales of heavy trucks in the USA provide a clear leading indicator of recession. They have led every recession over the last 58 years. They are falling fast now.
What about false signals? 1986/87 was a slowdown, not technically a recession, and in fact heavy truck sales didn't fall that much. In 1996, growth slipped to 1.2% QoQ, annualised. In 2011, growth was negative in Q1 and again in Q3, but that doesn't count, technically, as a recession. In 2016, growth slumped to 0.7% QoQ annualised. In these cases, the slide in heavy truck sales portended a slowdown not a recession.
And, you can't rely on just one indicator. There are differences between every recession and every recovery. Random fluctuations can affect how soon and also by how much indicators turn down or up. But we're getting enough slumping economic time series to suggest a recession is on the cards.
And the longer the tariff pagaille continues, the worse it will be. Trump likes tariffs. He loves the attention he gets every time he changes policy, and he keeps on changing it. This uncertainty is very bad for consumer spending and business investment, and that's before the effect of price increases caused by tariffs on real income. I'm not optimistic that the US will avoid recession, and in my opinion, the likelihood of deep recession is high, because under the US system, there's no way to get rid of an incompetent and dangerous leader. The Republican Congress is too scared of MAGA, the Dems are too feeble (mostly), and Trump will likely go on making pronunciamentos on social media about tariffs until the end of his term, or at least to the mid-term elections (assuming they happen), throwing everything into chaos until then.
Will the Fed save us? Printing money (cutting interest rates) doesn't lead to real growth if the environment is too chaotic. It just leads to inflation. And anyway, the economy only responds with a lag. So, no.
The chart shows the PMIs for Australia from Judo Bank, smoothed with 5-month centred moving averages. (Data through April). Note the three downward spikes caused by Covid lockdowns in 2020, 2021 and the end of 2022.
Oz's main export markets are China and Japan, not the US. So we won't be directly affected by Trump's tariffs. But we could be indirectly affected by downturns in both countries, consequent on tariff increases; world growth is likely to slow, and may have already started to.
Given that inflation is within its target range (2 - 3%), our exports could be hit, and the A$ is strengthening against the US$, the RBA will likely cut rates a couple of times over the course of the next year. You will be happy to hear that's also the consensus of my economist colleagues.
[Update: Australia's PMI surveys are no longer sponsored by Judo bank, but by S&P Global themselves]
From Bill Grueskin
Excellent NYT graphic. In the space of about 3 months, tariffs on China: -- doubled; -- went up ≈ 2.5X from there; -- roughly doubled again; -- went up ≈ 40% from there; -- and now have dropped ≈ 80% from the peak -- but are still 3X what they were in February. www.nytimes.com/article/trum...
It's been a long-term project of mine to look at how smaller economies respond to the cycles caused by the larger economies, what I call the big 8: the USA, the Euro zone, China, Russia, Japan, India, Brazil and the UK.
Since I don't have official PMI data going back much before 2012 for most of these small economies, and since I want to examine patterns over several business cycles, what I have done is to use business confidence time series to estimate what the PMIs would have been if they were available. The correlation is usually close between business confidence and broader-based PMIs. In some cases there are "PMI" series produced by other agencies, for example in South Africa and Australia, or there are PMI-like indicators, e.g, Sweden and Switzerland, produced by national chambers of commerce or industry.
I have not extreme-adjusted these series. Where they are "spiky", I have smoothed them by fitting 7- or 5-month centred moving averages.
The results for the GDP-weighted average of the small-15, recently expanded to include Turkey, Mexico and Malaysia, look like this, when compared with the Big-8:
The last time the US raised tariffs sharply, during the Great Depression (the Smoot-Hawley tariffs), this worsened the global and the US recession, turning it into the Great Depression, as jumps in US tariffs were followed by increases elsewhere. Note that it was a Republican president, House and Senate which passed the tariff legislation, leading to a massive swing to the Democrats which lasted 20 years.
The trade wars initiated by Trump are having the same effect. The collapse is just beginning. And every month that the tariffs and the tariff uncertainty remain worsens the situation. Obviously, if tariffs quickly return to pre-Trump levels, the recession will likely be short. But even then, damage has been done, and trade flows will be permanently altered. Unfortunately, Trump shows no signs of changing course. Even the supposed "reset" with China would still apply 30% tariffs to Chinese exports to the USA. There is no one grown up in the Administration who will talk him down from the ledge. No one in the Republican Party has the courage to stop him. They fear his MAGA movement too much. By the time Congress does act, it will be too late.
OK, here I showed Mexico's PMI, which is falling fast. So what's been happening to Canada? Well, it's no surprise that it too is plunging. In fact, the plunge started when Trump imposed his "beautiful" tariffs. In common with much of the rest of the world, Canada had started a new upswing as the impact of interest rates started to wear off. This upswing has come to an abrupt end. (Heading towards Covid Crash levels!!)
