Purchasing Managers’ Indices and the state of the global economy
- The latest flash (preliminary) Purchasing Managers’ Indices (PMIs), published by IHS Markit, point to a sharp deceleration in the global economy in June. However, they do not yet point to recession. In the four large economies on which Markit reported (the United States, the United Kingdom, Eurozone, and Japan), the PMIs for both manufacturing and services remained in growth territory in March. However, the speed of deceleration was alarming as were some of the details of the reports.
PMIs are forward-looking indicators meant to signal the direction of activity in the broad manufacturing and services sectors. They are based on surveys of purchasing managers who are asked about output, new orders, export orders, employment, input and output pricing, inventories, pipelines, and sentiment. A reading above 50 indicates growing activity; the higher the number, the faster the growth—and vice versa.
For the United States, the PMI for manufacturing fell sharply, from 57.0 in May to 52.4 in June, a 24-month low, but still a level indicating modest growth in activity. However, the devil is in the details, which suggest trouble. For example, the subindex for output indicated a decline in June. In fact, the subindex for output fell at the third-fastest pace since the survey began, only exceeded in 2008 and 2020, both at the start of recession. In addition, there was a decline in new orders as well as export orders. The weakening of new orders reflected lower demand that was related to high inflation, the impact of higher food and energy prices, and weakened consumer and business sentiment. Input costs continued to soar, largely due to rising energy prices.
Meanwhile, the PMI for services in the United States fell from 53.4 in May to 51.6 in June, indicating very slow growth in activity. Output growth remained positive in June, but new orders declined. Input and output price increases eased, backlogs declined, and employment growth decelerated.
Overall, Markit concluded that the US PMI data for June signals a substantial weakening of economic activity, but not a decline. Markit commented that “the survey data are consistent with the economy expanding at an annualised rate of less than 1% in June, with the goods-producing sector already in decline and the vast service sector slowing sharply.” It said that consumer demand is weakening largely due to inflation concerns. Business demand has weakened as well, largely due to fears that monetary policy will stifle economic growth. Markit also suggested that weakened demand could help reduce inflationary pressure.
In the Eurozone, the PMI data was similar to that of the United States. The manufacturing PMI fell from 54.6 in May to 52.0 in June, a 22-month low. The services PMI fell from 56.1 in May to 52.8 in June. The rising cost of energy and the continued supply chains disruptions were blamed for weakening demand, leading to a sharp slowdown in economic activity. The slowdown was led by manufacturing, which was especially weak in Germany. Markit commented that, aside from the initial devastation of the pandemic in early 2020, “June’s slowdown was the most abrupt recorded by the survey since the height of the global financial crisis in November 2008.” It said that the latest data suggests June GDP growth at a rate of just 0.2%.
Other signs of weakness include a sharp decline in business confidence as well as a buildup of inventory. The latter suggests that manufacturers might cut output in the coming months. The European Central Bank (ECB) has so far avoided a rapid tightening of monetary policy, in part due to fears that Europe’s economy is weaker than that of the United States and more susceptible to recession.
In the United Kingdom, the manufacturing PMI fell from 54.6 in May to 53.4 in June, a 23-month low. The services PMI was unchanged at 53.4. Thus, the British economy did not decelerate to the degree that the economies of the United States and Eurozone experienced. On the other hand, Markit offered a sober assessment. It said that “the economy is starting to look like it is running on empty. Current business growth is being supported by orders placed in prior months as companies report a near-stalling of demand. Manufacturers in particular are struggling with falling orders, especially for exports, and the service sector is already seeing signs of the recent growth spurt from pent-up pandemic demand moving into reverse amid the rising cost of living.” Moreover, with inflation continuing to surge and the Bank of England tightening monetary policy, most risk remains on the downside.
Lastly, Japan defied the trend seen in the other major advanced economies. Japan’s PMIs suggested some improvement. Markit commented that Japan saw the “strongest rise in private sector output in seven months.” Japan has experienced weakness due, in part, to voluntary and government-imposed restrictions related to COVID-19. Restrictions have been eased and activity is rebounding modestly. Moreover, inflation is relatively low and the central bank and the government both maintain easy monetary and fiscal policies, respectively.
Thus, Japan’s manufacturing PMI fell slightly from 51.5 in May to 51.0 in June. More notably, the services PMI increased from 52.6 in May to 54.2 in June as the economy continued to reopen. Meanwhile, as China reopens, it is likely that this will have a positive impact on Japan’s economy.