June Markit PMI Signals Just 1.4% Economic Growth

June Markit PMI - Is This A Slowdown?

Before getting into June Markit PMI let's discuss some overall mixed market signals. During most slowdowns, opinions are varied because the data isn’t consistent. Some economists are wondering why the Fed is about to cut rates and others think the economy is headed for a recession. 

If you review all the data instead of cherry-picking whatever supports your thesis, you can see this is a mixed bag. Also, keep in mind, predictions on Fed policy, the economy, and the stock market aren’t all reliant on the same factors. For example, earnings data helps determine where stocks are headed, but it doesn’t tell us about Fed policy or the economy. They are all related, but not 100% correlated.

Fed is cutting rates because of worries about trade and because inflation is low. Stocks are rallying partially because investors think a trade deal will be made. Some are also increasing because of solid earnings. The first 8 companies to report Q2 2019 results have had an average of 19.18% EPS growth. That’s much better than the previous quarter’s average of 13.21%. 

To be clear, earnings are helped by a strong economy, but they don’t always need one. We saw this first hand in Q1 when EPS growth was above 5% and final sales growth was the weakest in 6 years. Currently, Q2 GDP growth is expected to be 1.9%. The trade war is hurting some soft data economic reports such as the Empire Fed manufacturing general business conditions index.

Another Bad Flash PMI

May Flash Markit PMI was shockingly terrible which led investors to discount it slightly until we saw the final result. The final result was almost identical to the initial reading. This told us this slowdown is real, at least according to Markit data. This time the weakness isn’t as shocking. 

The sequential decline wasn’t as bad, but the PMIs inched closer to 50 which signals no growth. Specifically, the composite output index was down from 50.9 to 50.6 which is a 40 month low. Services index was down from 50.9 to 50.7 which is also a 40 month low. I wasn’t expecting the weakness in services as much as I was expecting the weakness in manufacturing. Nothing is holding the composite up. It can easily fall into contraction territory this summer.

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