This past week we received the latest PMI readings for the U.S. and the eurozone, as well as China's PMI as tabulated by HSBC/Markit. For better or worse, all we have to contend with are the individual country numbers, and by now everyone knows that 50 and above signals expansion. The latest number out of the Institute for Supply Management ("ISM") was 49.7, which signals contraction, and one can look for clues in the individual components, such as "Backlog of Orders" and "New Orders," but the regional Fed numbers were already painting a weak picture.
As a quick side note, the "prices" component tumbled to 37 from 47.5 in May and 61 in April, while the highest reading for "prices" in recent memory was 85.5 in April 2011. That's deflationary pressure on steroids, and crude oil did have a hand in it, further highlighting that pure economic demand is weak at best.
For those who do not know what the PMI numbers mean, they represent a "percentage reporting each response" and the ISM explains further.
A PMI reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally declining. A PMI in excess of 42.6 percent, over a period of time, indicates that the overall economy, or gross domestic product ("GDP"), is generally expanding; below 42.6 percent, it is generally declining. The distance from 50 percent or 42.6 percent is indicative of the strength of the expansion or decline.
We can say that we are "generally declining," although we shouldn't be pulling the fire alarm, yet. But we're still left with country specific readings, and the impact of each individual economy on a global scale varies by size. Thus, the current PMI readings for the U.S., eurozone, and the BRICs were gathered, as well as their respective PMI numbers for the June 2010 and June 2011 periods, producing the global averages.
|June 2012||June 2011||June 2010||GDP ($ billions)||% of Total GDP (US/EU/BRIC)|
What we see is a global decline, but we must consider the sizes of the respective economies, and it was done by gathering the GDPs, adding them up, and calculating the country percentages. For instance, the GDP for the U.S., eurozone and the BRICs combined is $38,214 trillion, and the U.S. represents 38.16% of the total. In addition, the total GDP for the above referenced countries is close to 60% of total global GDP.
Then the GDP adjusted PMI averages were calculated by modifying them with the country GDP percentages, and the chart below emerged.
It's unsettling enough that the average Global PMI has been in decline for two years, but when adjusted for GDP, the negative slope is far more pronounced. But that is not all, because we must put the data in the context of where we have been.
Considering that economic stimuli has been applied across the global economic landscape for as long as anyone can remember, while the ongoing European debt crisis still lacks a credible resolution, one must only wonder what the future holds. Meanwhile, the BRICs turned out not to be the lifeguards that the experts had assured us they would be, and it goes without saying that China's economic troubles - debt and otherwise -- are well beyond the percolating stage, although officials have been extremely gracious thus far. As far as equities are concerned, the Financial Times had the perfect headline: "Hopes of stimulus steps support stocks."
The FTSE All-World equity index sits near to an eight-week high as easing eurozone tensions and hopes for more central bank support counteract recent poor economic data.
But central banks have already flooded the markets with liquidity, while governments have amassed debt to feed the economic engines that couldn't. And if the European Central Bank lowers rates by 25 basis points, it's the equivalent of adding another sugar cube to a coffee cup that is already saturated with the sweetener. So here we are, with all the monetary and fiscal ammunition used up, and circled by predators without a defense, while looking for sticks and stones to break some recessionary bones.