Final PMI Data Confirm Global Downturn
The release of the FOMC statement made other data releases a side show on Wednesday, but we received the final July PMI numbers for a number of major countries as well as the U.S. ISM, and they all confirmed the flash PMI or other preliminary data (such as the regional Fed surveys): the global economy is contracting. The end result of several years of heavy monetary pumping and massive deficit spending can be checked out below (a list with links to the PMI reports follows – all except the U.S. ISM report are pdf files; we have added a brief comment to each link):
- U.K. manufacturing PMI - worst contraction since March of 2009
- Euro Area Manufacturing PMI – manufacturing recession deepens further
- German manufacturing PMI – steepest fall in output since April of 2009
- French manufacturing PMI – falls to a 38 month low as pace of decline accelerates
- Italy's manufacturing PMI – a three month low, employment contracts at sharpest pace since October of 2009
- China, HSBC PMI – first increase in output in five months, but final data worse than flash PMI, remains in contraction territory overall
- Spain's manufacturing PMI – output, new orders and employment all continue to contract sharply.
- Japan's manufacturing PMI – sharpest deterioration since April of 2011 (n.b., that was right after the tsunami)
- U.S. ISM Report – contraction slows somewhat (49.8 from 49.7), a mixed bag.
Eurozone manufacturing PMI – the ongoing horror-show.
Euro area manufacturing PMI disaggregated: note that it is now the "core" where the steepest declines are occurring, while the pace of contraction is easing in the periphery. In Ireland a mild expansion continues to be recorded - click chart for better resolution.
It is therefore somewhat gratifying that the Fed once again decided to essentially do nothing – the "preemptive easing" faction seems to have lost the debate this time around. More quantitative easing is not going to help the economy beyond inducing a brief "sugar high" as a number of bubble activities will be temporarily revived, but it will definitely further undermine the economy structurally (this is not the reason why the Fed stood aside unfortunately).
As we have pointed out before, it was to be expected that if traders were pushing up the stock market in expectation of more "QE," they would be engaging in a self-defeating activity. With the stock market near its recent highs and an election year hamstringing the Fed to some extent, it was almost inevitable that the central bank would stand pat. This could actually make for a precarious few weeks for the stock market (unless Mario Draghi pulls a big enough rabbit out of his hat).
Advanced Kremlinology Department
However, now that we have a tool that allows U.S. to engage in instant Kremlinology, namely the FOMC statement comparator/tracker published by the WSJ, we can come to some conclusions about the FOMC's "propensity to ease." This is not the same as judging the likelihood that new easing measures will be announced at the next rate setting meeting. That will once again crucially depend on where the stock market trades prior to the meeting, as well as the economic history written until then. The Fed will study the recent past, and base its decisions on that (officially its decisions are based on forecasts, but even the Fed-heads must realize by now that they can't forecast their way out of a paper bag).
So what are the decisive passages revealed by the statement comparator? We've picked out the most important changes and reproduce them below (stricken out words were in the June statement, bolded sections are in the new one)
Information received since the Federal Open Market Committee met in
AprilJune suggests that theeconom y has been expanding moderatelyic activity decelerated somewhat over the first half of this year. However, gGrowth in employment has been slow edin recent months, and the unemployment rate remains elevated.
appears to behas beenrising at a somewhat slower pace than earlier in the year. Despite some further signs of improvement, the housing sector remains depressed. Inflation has declined since earlier this year, mainly reflecting lower prices of crude oil and gasoline, and longer-term inflation expectations have remained stable.
is prepared to take further action as appropriatewill closely monitor incoming information on economic and financial developments and will provide additional accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.
Voting against the action was Jeffrey M. Lacker, who
opposed continuation of the maturity extension programpreferred to omit the description of the time period over which economic conditions are likely to warrant an exceptionally low level of the federal funds rate.
Whoa! Et tu, Jeffrey? It appears as though Mr. Lacker's dissent has weakened somewhat. This reminds U.S. of how the three famous "hawkish" dissenters in 2011 slowly but surely returned to barely audible grumbling and were then replaced by a dissenter demanding more easing measures right away (Mr. Charles Evans of the Chicago Fed, whom we have nicknamed 'Gutenberg').
As well-trained Kremlinologists we conclude from the above that yes, they are indeed chomping at the bit. Clearly they have downgraded their economic assessment, their 'inflation' outlook remains more or less unchanged (there is none and won't be any, ever again), and they have even left the door open for taking new measures at any time – presumably this won't necessarily have to await the next FOMC meeting. At least that is what the phrase 'will provide additional accommodation as needed' seems to suggest.