by Jay Powell’s 2018 case for his economic “boom”, the one which was presumably behind his hawkish aggression, rested largely upon the unemployment rate alone. A curiously thin roster for a period of purported economic acceleration, one of the few sets joining that particular headline statistic in its optimism resides in the lower tiers of all statistics. The sentiment contained within the ISM’s PMI’s were at least in the same area as the unemployment rate, and therefore they were upgraded and then relentlessly highlighted as if comprehensively irrefutable. With the unemployment rate, you could at least see why there was such an error. ISM Purchasing Managers Indexes, 2008-2020 - Click to enlarge The participation problem left the denominator improperly
Topics:
Jeffrey P. Snider considers the following as important: 5.) Alhambra Investments, currencies, economy, Featured, Federal Reserve/Monetary Policy, ihs markit componsite pmi, ihs markit manufacturing pmi, ism manufacturing index, ism non manufacturing index, Markets, newsletter, PMI
This could be interesting, too:
Frank Shostak writes Assumptions in Economics and in the Real World
Conor Sanderson writes The Betrayal of Free Speech: Elon Musk Buckles to Government Censorship, Again
Nachrichten Ticker - www.finanzen.ch writes Bitcoin erstmals über 80.000 US-Dollar
Nachrichten Ticker - www.finanzen.ch writes Kraken kündigt eigene Blockchain ‘Ink’ an – Neue Ära für den Krypto-Markt?
|
Jay Powell’s 2018 case for his economic “boom”, the one which was presumably behind his hawkish aggression, rested largely upon the unemployment rate alone. A curiously thin roster for a period of purported economic acceleration, one of the few sets joining that particular headline statistic in its optimism resides in the lower tiers of all statistics. The sentiment contained within the ISM’s PMI’s were at least in the same area as the unemployment rate, and therefore they were upgraded and then relentlessly highlighted as if comprehensively irrefutable. With the unemployment rate, you could at least see why there was such an error. |
ISM Purchasing Managers Indexes, 2008-2020 - Click to enlarge |
| The participation problem left the denominator improperly stripped of a large multitude of formerly American workers. Decried by Economists as merely lazy, it has been Economics (and its media) which was lazy in failing to seek out legitimate and reasonable answers for the ratio’s deficiency.
But how do we explain the ISM? To my knowledge, it’s never been properly characterized nor opened up sufficiently to illuminate this clear and quite obvious upward bias in both sets (below). Furthermore, this is a more recent development. For the non-manufacturing version, it dates back to mid-2015 or so, just in time to overhype Reflation #3 as perhaps globally synchronized growth. |
ISM Purchasing Managers Indexes, 2006-2020 - Click to enlarge |
| The ISM Manufacturing PMI’s discrepancy goes back a little further, perhaps suggesting an answer for both of the organization’s indices. You may recall that on first estimation, before the data from the 2012 Economic Census was absorbed and added to the government’s economic statistics concerning manufacturing, the rebound during 2013-14 (Reflation #2) was more robust in a broad range of accounts (durable goods, factory orders, imports, etc.)
It wasn’t until subsequent benchmark revisions that the upturn in those years was whittled down practically to nothing, or what we see of it today (long after the public’s attention had moved on). While the ISM undergoes seasonal revisions, it does not substantially revise its prior readings. Therefore, when comparing the Manufacturing PMI to manufacturing-related accounts this underlying bias becomes quite noticeable. Not just in that specific revision-heavy period of Reflation #2, but even more so with Reflation #3 as if the words globally synchronized growth meant something to ISM respondents they sure didn’t in terms of hard data. |
ISM Purchasing Managers Indexes, 2006-2020 - Click to enlarge |
| Here in 2020, as the domestic and global economy reopens the paramount question isn’t one of the bottom, a rebound, or even some upside; it’s recovery and only recovery. PMI’s are already ill-suited for this job, especially since they are viewed and interpreted like they display economic levels. Not all 50’s are the same (nor 60’s, for that matter).
After a substantial decline, we would expect a substantial increase. That doesn’t mean recovery, necessarily, only suggesting that an inflection point has been reached. As I wrote last week:
|
IHS Markit US Composite, 2012-2020 - Click to enlarge |
| 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 separates the bottoming out process from the transition to recovery in PMI terms is higher levels being sustained for a significant period. The lower the trough, the higher the rebound. Symmetry counts. But even more than that, corroboration. If the economy is actually undertaking an actual recovery, it would be clear across a majority of accounts and statistics. A true upswing is powerful enough on its own to register clearly and widely, not the feverish upselling and overhyping of a few minor points. To begin with, examining the ISM, this shouldn’t have been the outlier in its own category. IHS Markit’s similar PMI indices, for example, never did climb aboard with the globally synchronized growth pandemic. These other sentiment indicators were far more consistent with Reflation #3 and nothing better; so, they were downgraded in the mainstream view despite being far more in line with practically every other measure including GDP. |
IHS Markit US Manufacturing, 2012-2020 - Click to enlarge |
For June 2020, the ISM’s bias is back on display again. Last week, the group said its manufacturing PMI climbed up to 52.6 from 43.1 in May – after having been no lower than 41.5 at the trough in April.
Services, meanwhile, the ISM Non-manufacturing PMI today was reported to have leapt up as far as 57.1 last month from 45.4 the month before (and no worse than 41.8 in April). While that level would be consistent with only the bottoming out process, it’s not even consistent across PMI’s.
According to IHS Markit, on the other hand, its Services PMI remained firmly below 50 (47.9) even as it was upgraded significantly from its flash reading (46.7) released late last month. This latter number also suggests a bottoming out, but well behind in the process (still shrinking, though now at a substantially lesser rate) from where the ISM apparently sees it (no longer shrinking, instead already moving back upward again at a relatively decent, but so far insufficient, pace).
Therefore, take your pick while being mindful that neither set of numbers are equal to recovery. That’s the part the ISM proponents are leaving out, alongside any notion of this obvious upward bias. Further along in the rebound process isn’t the same thing at all.
In fact, I’d have expected much better by now; given the size of the decline and the fact that the bottom had been reached several months ago, where are the 60s maybe even 70s? Since we are following behind China’s reopening, I’ll end here with what I wrote in March about that:
When the index falls to something like 35.7 or 29.6, what that meant was a near complete drop across the whole range of businesses in both economic segments. If the rebound was as instantaneous as people seem to be interpreting from these figures, then the PMI’s should have been something like 60 or even 70.
All a 52 suggests when it follows a 35 is that it might not have gotten worse…To immediately jump to the conclusion that it must be getting better is being impatient.
Same with 57.1 – and that would have been with corroboration. Without it, as Markit proposes, people are being gratuitously impatient.
You Might Also Like
Take Your Pick of PMI’s Today, But It’s Not Really An Either/Or
Take your pick, apparently. On the one hand, IHS Markit confirmed its flash estimate for the US economy during February. Late last month the group had reported a sobering guess for current conditions. According to its surveys of both manufacturers and service sector companies, the system stumbled badly last month, the composite PMI tumbling to 49.6 from 53.3 in January.
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? Doesn’t matter; some faceless group of analysts and Economists whose short-term modeling has somehow become the very standard of performance.
China’s Back!
The Washington Post began this week by noting how the US economy seems to have lost its purported zip just when it needed that vitality the most. Never missing a chance to take a partisan swipe, of course, still there’s quite a lot of truth behind the charge. An actual economic boom produces cushion, enough of one that President Trump and his administration may have been counting on it when opting for full-blown shutdown.
Not COVID-19, Watch For The Second Wave of GFC2
I guess in some ways it’s a race against the clock. What the optimists are really saying is the equivalent of the old eighties neo-Keynesian notion of filling in the troughs. That’s what government spending and monetary “stimulus” intend to accomplish, to limit the downside in a bid to buy time. Time for what? The economy to heal on its own.
Looking Ahead Through Japan
After the Diamond Princess cruise ship docked in Tokyo with tales seemingly spun from some sci-fi disaster movie, all eyes turned to Japan. Cruisers had boarded the vacation vessel in Yokohama on January 20 already knowing that there was something bad going on in China’s Wuhan. The big ship would head out anyway for a fourteen-day tour of Vietnam, Taiwan, and, yes, China.
Reality Beckons: Even Bigger Payroll Gains, Much Less Fuss Over Them
What a difference a month makes. The euphoria clearly fading even as the positive numbers grow bigger still. The era of gigantic pluses is only reaching its prime, which might seem a touch pessimistic given the context. In terms of employment and the labor market, reaction to the Current Employment Situation (CES) report seems to indicate widespread recognition of this situation. And that means how there are actually two labor markets at the moment.
Monthly Market Monitor – July 2020
Most Long-Term Trends Have Not Changed. A lot has changed over the last 4 months since the COVID virus started to impact the global economy. Asia was infected first with China at ground zero. Their economy succumbed first with a large part of the country shut down to a degree that can only be accomplished in an authoritarian regime.
Don’t Forget (Business) Credit
Rolling over in credit stats, particularly business debt, is never a good thing for an economy. As noted yesterday, in Europe it’s not definite yet but sure is pronounced. The pattern is pretty clear even if we don’t ultimately know how it will play out from here. The process of reversing is at least already happening and so we are left to hope that there is some powerful enough positive force (a real force rather than imaginary, therefore disqualifying the ECB) to counteract the negative tendencies in order to set them straight before it becomes too late.
Tags: currencies,economy,Featured,Federal Reserve/Monetary Policy,ihs markit componsite pmi,ihs markit manufacturing pmi,ism manufacturing index,ism non manufacturing index,Markets,newsletter,PMI