Global Manufacturing Falls - Weak Markit Manufacturing PMI

The Markit manufacturing PMI was 53 in February which fell from 54.9 in January. This is the slowest rate of manufacturing growth since August 2017. 

Inflation eased, but the rate of output and new order growth slowed. This report supports most other manufacturing metrics which show manufacturing growth slowed sharply in February. This shouldn’t be a surprise because the global economy is weakening.

Global manufacturing PMI fell slightly from 50.8 to 50.6 which is a 32 month low. The worst decline in the global PMI was the future output index which went from 60.7 to 59.2. 

As you can see from the chart below, slightly more than half of the countries in the index have either expanding or stable manufacturing PMIs. This is very close to the bottom in early 2015. More weakness would bring this percentage near the low of 2012. Also, this supports Ned Davis Research’s claim that the global economy is in a recession.

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Getting back to the American PMI, the output increase was the softest since September 2017. Growth in new manufacturing business was the weakest since June 2017. Cost inflation fell to an 18 month low. The 1-year outlook for output fell to the 2nd lowest level since November 2016.

Capacity constraints aren’t as big of an issue. The overall index was hurt by tariffs, the trade war, and political uncertainty. The trade war between America and China is winding down, which should help this sector later this year. 

We will see how powerful the cyclical weakness is when the tariffs are gone, and free trade is expanded. The global economy could do a 180-degree turn, but the turn wouldn’t be exclusive because of changes to trade policies.

Global Manufacturing Falls - Weak ISM PMI

Compared to other measurements of manufacturing, the February ISM PMI was strong, but compared to recent ISM data, the report was very weak. 

PMI was 54.2 which missed estimates for 55 and was a 2 year low. This PMI is consistent with 3.3% GDP growth on a quarter over quarter basis. That is much quicker than current estimates for Q1 growth. According to the CNBC rapid update, the median of 7 estimates calls for only 1% growth. It’s not impossible for manufacturing to grow quickly in a moribund economy. 

Manufacturing is a small portion of the economy. However, I expect manufacturing to grow very slowly, while the overall economy slightly outperforms; that’s based on the February flash Markit reading.

New orders index fell 2.7 points to 55.5 and production fell from 60.5 to 54.8. There are no longer capacity constraints as the supplier deliveries index fell from 56.2 to 54.9 and the prices paid index fell 0.2 to 49.4. 

As you can see from the chart below, the combination of delivery times and prices paid fell almost 20 points from the 2018 peak. Production and new orders fell less which is great news. Fed should be happy with the lack of inflation. When the tariffs are removed or weakened, prices will fall even further. 

The best part of the ISM report was that backlogs and new exports were up from 50.3 and 51.8 to 52.3 and 52.8.

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Global Manufacturing Falls - Quotes From ISM

It’s very important to review the quotes from this ISM report. We need to see why growth has fallen to a 2 year low and if it will pick up in the next few months. 

A computer and electric parts company stated, “Demand remains healthy at the beginning of 2019. However, growing concerns for what could be another round of tariffs in March are further escalating price increases of already constrained electronic components. 

Expect to see increased lead times and prices throughout Q1 and Q2.” I’m not sure at what point in the month this survey took place, but I bet if this firm was asked today about its tariff worries, the firm wouldn’t be nearly as concerned. America and China could be one month away from striking a trade deal. 

China is currently offering to lower tariffs on the farm, chemical, auto, and other products. That computer firm shouldn’t worry about new tariffs.

A fabricated metal products firm stated, “Business so far this year is meeting, but not exceeding, our forecast. We are concerned about indicators showing a slight recession for the second half of the calendar year.” 

I’m not sure which indicators are calling for a recession. The ECRI leading index is negative, but it’s probably not low enough to call for a recession. It’s certainly possible that manufacturing continues to weaken in the next few months because of cyclical reasons. 

However, as I mentioned, the end of the trade war will be a positive catalyst. I’m confident the Q1 GDP report will be weak, but there won’t be a recession in 2019.

Global Manufacturing Falls - Weak Earnings Revisions

Forward S&P 500 PE ratio was 16.03 as of March 4th. The weaker estimates get, the more expensive stocks are on a forward basis. 

Earnings revisions for Q1 are -3.79% which is the worst decline since Q1 2016 which was the end of the last earnings recession. According to The Earnings Scout, Q1 earnings are expected to fall 0.16% year over year. Since estimates are usually beaten, that means there will still be growth next earnings season.

As you can see from the charts below, forward earnings revisions in Europe, Japan, and emerging markets are also weak. 

Only emerging markets show a slight improvement. These declines don’t justify the global rally this year. If economic data doesn’t improve in the next few months, another decline will ensue shortly.

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Global Manufacturing Falls - Conclusion

Global manufacturing is nearing a recession. American manufacturing is outperforming, but growth is still very low. 

I think services will outperform in Q1, but it looks like American GDP growth will be below 2%. Earnings revisions have been terrible across the world. 

These declines don’t justify a soaring stock market. However, an American earnings recession isn’t a lock either which means the S&P 500 shouldn’t revisit its bear market lows last year. 

The economy is continuing along this slowdown, while the market is acting like there are numerous reports showing the economy is heating up again (it isn’t).