A Lesson In PMIs: Relative Vs. Absolute

Reports of the “V’s” demise greatly exaggerated, at least in America? Decoupling finally scores its first victory after nearly thirteen years of trying?

Reading these PMI figures appropriately, however, you realize that there isn’t actually much difference in them between the US and Europe once you normalize to the situation which actually exists in 2020. The economy this year is nothing like what it had been in 2015 or 2014; and let’s not forget, those years were not particularly great years for the economy in any other place than media stories.

This is why we’ve termed the trend since June a summer “slowdown” rather than downturn or recession; those latter two will be applied to Europe. The US sentiment figures are, believe it or not, consistent with that slowdown – not so different than Europe.

The US economy, maybe unlike its European economy right now, continues to rebound. What’s at issue is just how strongly this might be happening.

A high 50s in any PMI sounds unassailably terrific; and it could be terrific if you see high 50s show up and stay up in a sentiment survey surveying conditions in an otherwise normal and legitimately booming economy. An economy instead experiencing suspiciously low levels of growth, like since 2007, well, high 50s does not mean the same thing at all.

In that second case, like in both 2014 and 2017, high 50s simple means(t) the system is moving forward. That’s it. In other words, all it would really indicate is an absence of further contraction (like 2012, 2015-16, and 2018-19) which isn’t at all the same thing as accelerating into full recovery.

You can see exactly what I mean below:

Though the ISM’s index reached 60 (or close to it) in each of those marked periods above, they weren’t the same 60 each time; especially the last one. Manufacturing output in the US during 2017 was still substantially less than it had been at 2007-08 peak, and not even that much more than it had been in 2004!

Instead, high 50s or better in 2017 merely demonstrated how at most there was a good chance the economy was moving forward and not falling backward – at that moment. Even in the high 50s/low 60s, there wasn’t much or any acceleration.

Same PMI numbers, very different interpretations.

More to the point, that lack of meaningful acceleration given woefully inadequate baseline conditions despite a wildly optimistic mainstream interpretations of the ISM’s high 50s/low 60s would ultimate lead to the same kind of divergence and resurgence in claims of decoupling. In 2018, Europe and the US didn’t end up going in different ways, they would end up moving the same way (downturn) just at different times.

If the economy was actually set to accelerate meaningfully, meaning to pull out of its longer-run rut and ramp up into a legitimate recovery, we’d have seen PMI’s jump from the high 50s to the high 60s and probably better than that. Only the ISM’s index accomplished halfway to that level. Even that was an isolated case corroborated only by a few other data points (like the faulty unemployment rate).

Some things never change.

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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