The recent release of the Purchasing Managers Index reports for September from selected countries around the world have provided us with an updated snapshot of the global economy. There are a couple of trends that I see consistently throughout the globe with few exceptions. First, there has been an across the board contraction in new manufacturing orders with the only exceptions being the U.S. and U.K. in the advanced economies, Turkey and the Czech Republic in emerging Europe and India in Asia. The second trend is the contraction in order backlogs. Of the countries surveyed, only Canada and the Czech Republic have outstanding orders that are still growing. In addition to declining back orders, several countries in both Europe and Asia reported falling production during September, which suggest spare capacity in those countries. When production levels more closely match demand employment in those countries will be affected.
Clearly the European economy is weakening with only the U.K. holding on to positive growth. Negative GDP growth in the eurozone is only a quarter or two away. One other notable trend is in the number of countries that report declining exports being largely responsible for the fall in their new orders. Seven of nine European countries and all five reporting Asian countries expressed this. Exports in the U.S. and Canada are flimsy but still growing. In fact Canada's manufacturing sector is growing faster than any country in the world, according to the PMI surveys.
The U.S. manufacturing sector is growing, albeit at a sputtering pace. Iron and steel mills are seeing a contraction in new orders and order backlogs. Unfilled orders at the mills have declined for six straight months. This would explain the decline in price of stocks like AK Steel (AKS) and Steel Dynamics (STLD). These stocks are down 58.6% and 40.9% respectively, year-to-date. Both stocks are relatively inexpensive at their current levels, however I would allow the business cycle to run its course and bottom out before buying either of these steel makers. These are high beta stocks and I see no reason subject my capital to unnecessary volatility during these times of heightened uncertainty. Blue chip, dividend paying stocks are the best investments at the moment.
The services sector paints a somewhat rosier picture at-a-glance but a look at the details revealed that service sector growth is simply receding a little slower than manufacturing. In the U.S., new orders grew at a faster rate while back orders did an about-face and returned to growth after falling in September.
Supplier deliveries sped up during the month. When supplier delivery speed picks up, it is a sign of slowing demand. September marked the first month of faster deliveries after being slower for 17 straight months and bears (no pun intended) watching for the next few months. In many countries employment, backlogs, new orders and even prices charged for services rendered in the service sector are dwindling.
The prices for raw materials continue to rise around the world in both the manufacturing and service sectors with Japan being one notable exception. Their service sector is reporting falling prices for raw materials. Only in the perpetually deflationary Japan could prices fall in an otherwise inflation ridden world. One can only hope that in two decades this is not happening in the U.S. After all, the U.S. financial crises and the initial response of the government and financial sector shares some strikingly similar characteristics with what occurred in Japan in the late 1980's.
The eurozone will most likely show negative GDP growth in the 4th quarter of this year and despite its current resiliency, the U.S. will probably succumb to a negative quarter or two in the first or second quarter of 2012. In the age of integrated global markets when one child brings home a virus everyone in the house eventually gets sick. Only a few will become seriously ill but everyone will at least catch the sniffles.