What The PMIs Aren’t Really Saying, In China As Elsewhere

China’s PMI’s continue to impress despite the fact they continue to be wholly unimpressive. As with most economic numbers in today’s stock-focused obsessiveness, everything is judged solely by how much it “surprises.” Surprises who? It doesn’t matter; some faceless group of analysts and Economists whose short-term modeling has somehow become the very standard of performance.

According to one such group, China’s official manufacturing index, the one calculated and maintained by the government (via its National Bureau of Statistics), solidly “beat” expectations. The headline was thought to have declined from May’s 50.6 to somewhere around 50.2. Instead, the NBS reports it accelerated during June 2020 to 50.9 for a big upside surprise.

While the manufacturing PMI was that to the easily impressed (and surprised), the non-manufacturing PMI was a resounding joy. At 53.6 in the prior month, the bar was set down at 52.1 (or thereabouts depending upon which “consensus” the consensus gives consent). Beating the forecast by more than two and a quarter points, the official version for June is 54.4.

Given the situation in which the Chinese economy finds itself, no different from that of the rest of the world, there isn’t any meaningful difference between 52.1 and 54.4. Neither of those actually indicate what everyone wants to see right now.

Acceleration. Meaningful acceleration.

Instead, these lower levels even though still above 50 indicate at best the economy bottoming out. Not acceleration. And that’s actually bigger trouble than it sounds since, going by the PMI’s as well as China’s official story, the non-economic shutdown ended months ago.

In terms of both China’s PMI’s, there was just the one month of the historic drop off (February) and then everything is supposedly moved back near normal.

To show what I mean when I claim that’s not what these PMI’s (nor anything else) are suggesting, we have to go beyond rates never forgetting that levels matter, too. In cases where there are sizable contractions, the starting levels matter even more.

All PMI’s tell us is whether there are more (>50), less (<50), or the same number (50) of respondents reporting growth. That’s it. So, if very few purchasing managers are telling the government they are seeing growth, then that’s consistent with a sizable economic decline.

Once that decline has finished, for whatever reasons, we should expect meaningful acceleration – what we (used to) call recovery. First, though, the economy has to bottom out, which in the PMI’s means a transition from sub-50 to more than 50. That by itself, however, does not mean anything more.

What needs to follow is that acceleration; if bottoming out is, after widespread contraction, the slight majority of respondents reporting growth then acceleration would be indicated when that small majority becomes an overwhelming one. Nearer everyone gets in on the upside.

In PMI’s, that means slightly above 50 isn’t nearly enough.

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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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