ISM index dropped: a healthy adjustment. In the USA, the fall of the ISM may reflect a return to a more normal situation? For many months, this indicator for the manufacturing sector was well above the CFNAI index which is a measure of 85 indicators of the economic activity (prepared by the Chicago Fed). This situation, which has been a regular occurrence since 2004, always ends with a sharp and brutal adjustment of the ISM to the CFNAI. The adjustment always takes place in this direction. Finally, the overly optimistic expectations contained in the ISM index adjust to the “real economy” which does not present excessive optimism. This adjustment is rather healthy.
The French government is still expecting a robust recovery for the last three months of 2018 and for 2019. Companies’ surveys for October do not allow such optimism. The main point is the rapid slowdown in the manufacturing sector. It was the leading sector in 2017 and its dynamics was an important contributor to the strong expansion seen this year. It was a source of impetus for the rest of the economy. Its current lower momentum is a source of concern. The retail sales sector is weak reflecting question on purchasing power for every French consumer. My expectations is that the French economy is back to the trend seen before 2017. It means that the forecast for GDP growth is close to 1.4%. This is consistent with what these surveys say. No strong recovery is expected and the French economy will converge to its potential growth which is lower than 1.5%.
The following graph shows the transitory recovery of 2017.
The economic environment is changing. The world Markit index level in the manufacturing sector is still showing growth (index at 53 above the threshold of 50) but it is trending downward since the peak of December 2017.
This new pace can be seen on the graph below where the world index, with a 3-month lead, is compared to the world trade yearly change. The consistency seen between the 2 suggests that world trade will falter in coming months.
I have added the new export index on the graph. It shows a rapid decline in May and June, probably a consequence of the uncertainty on world trade after the White House decisions on tariffs. The short term dynamics on the economic activity may be lower than expected.
The world trade rebound will continue in the forthcoming months. That’s what the graph between world trade growth and the Markit index suggests. The robust level of the manufacturing index is consistent with a stronger momentum on world trade.
Every region of the world shows an improvement in the manufacturing activity according to Markit. This will support a balanced growth scheme at the world level.A higher Markit index will boost trade and therefore world growth.
The momentum at the world level is strong and robust. The Euro Area is in a catchup period with a high momentum on new orders and on employment. The business cycle is virtuous. There are reasons to be optimistic on the Eurozone environment.
The situation is more specific in the US after hurricanes. The most important contributor to the ISM increase is the item on delivery. There were strong needs and it was difficult to deliver due to disruption and delays.
The situation is robust in Japan and the Brits are still optimistic on their activity.
Indices for emerging countries are robust. The situation is good for emerging countries: growth in developed countries + higher commodity prices + growth in China is steady + good financial conditions (the impact of Fed’s hikes on interest rates have been very limited)
The marginal slowdown is associated with a marginally lower index in China.
Strong profiles for Markit indices for the manufacturing sector in the Euro Area. This reinforces growth prospects for the region. All countries are growing even Greece for which the index is above 50 for the first time in a year (but only one month June2016). France is now marginally above Spain and Germany is very robust. The consistency of all these indices will improve trade within the Euro Area feeding economic expansion
New orders momentum is getting stronger at the end of the second quarter. This should lead to a strong acceleration in the manufacturing production index in the months to come. This will feed trade and growth.
At a disaggregated level, Germany has the strongest dynamics for orders. Italy and France are trending upward and Spain is in a robust trend, but not an accelerating one.
Pressures on prices are weaker in June. This is linked to lower oil prices. This will reduce tensions on the production price index. The ECB will not see higher inflation momentum and has no reason to change its mind.
Yesterday, in the Wall Street Journal (see here), Kathleen Madigan noticed that there was “no renaissance for manufacturing jobs”. And her chart is convincing. It shows the manufacturing production index and manufacturing employment since the business cycle trough in June 2009. The production index on the period is up by 25% and jobs by only 3.2%. Clearly the job recovery is weak, almost non-existent. But is it different from the past? Continue reading →