Tuesday, 3 July 2012

GLOBAL ECONOMY (July 3rd 2012): What You Need to Know About ISM and Global PMIs

The big economic news on Monday was the release of the US ISM Manufacturing PMI.

At Big Macro Picture, we consider this to be the most important global economic indicator of the month - moreso than the Non-Farm Payrolls, which gathers more attention amongst traders and the financial press.

As well as ISM PMI data, Monday also saw the release of 25 other significant economic reports from around the world, courtesy of Markit. We use this data to understand what kind of market cycle we're in, as part of LONG TERM and MEDIUM TERM categories of analysis. Below, we give a very simple summary of the first reports of the day (released before ISM Manufacturing), along with notes we wrote as the reports were released.


South Korean PMI - 49.4 in June, down from 51.0 in the previous month, citing lower international demand for Korean products.

Dutch PMI - 48.9 in June, up from 47.6 in May, despite European demand weakness and lower New Orders.

Taiwan PMI - posted 49.2 in June, down from 50.5 in the previous month, due to export weakness.

Vietnam PMI - 48.3 in May to 46.6 in June from lower New Orders and caution amongst clients. This is clearly a lagging indicator having only troughed in February from the 2011 slowdown.

Indonesian PMI - registered 50.2 in June, up from 48.1 in May. Similarly not the most accurate indicator for global conditions, but can be added to the "not making lower lows" category.

Russian PMI - declined from 53.2 in May to 51.0. Like the US economy, has broadly refused to be caught up in European slowdown, but did enjoy a high oil price in early 2012.

Indian PMI - posted 55.0 in June, little-changed from the reading of 54.8 in May. Another economy that has held up well unlike late 2011. Has fared far better than China in terms of how prospects have held up since last year. New Orders slowed a little and backlogs shrank a bit, but compared with other "emerging markets", India has enjoyed a much more stable 2012.

Poland PMI - fell to a 35-month low of 48.0 in June, from May’s 48.9. Very rapid backlog drawdown and a sharp reduction in new business, shows how real the problems are for smaller European countries. Of course, this says a lot about confidence in the immediate term amongst European countries rather than long term prospects.

Turkish PMI - posted 51.4 in June, up from a reading of 50.2 in May. Export new orders decreased for the first time since August 2011. Difficult to surmise anything new from the report or any logical trend in conditions.

Spanish PMI - fell to 41.1 in June, from 42.0 in May. 42 was abysmal in the first place, no prizes for guessing which economies are a drag on Europe at the moment. Reductions in input costs are barely registering at the moment as confidence in new business continues to sharply fall. We still await forward-looking activity to trough, no question that things are harder to stabilise when low confidence is matched with incompatible economic/monetary policy.

Czech PMI - 49.4, up from 47.6, which was a multi-year low. Main partner is Germany, which remains weak, and the overall trend is unquestionably down since early 2011. Another interesting bellwether for "Average Europe" - certainly a little bit better than last month, but in need of more evidence to prove it is bottoming.

Italian PMI - 44.6, down slightly from 44.8 in May. Another lower low, see description of Spain for the same story really. Another lower low for new orders too. Domestic economy is providing very little demand and is yet to show the benefits of lower input costs. Job cuts now catching up with March-present slowdown.

French PMI - posted 45.2, up from May’s three-year low of 44.7. This is encouraging. When confidence is battered, you start to look for signs that significant economies are reversing their downward trends, even if only for a few months. 45.2 is still unpleasant, but any improvement shows a sign of divergence from the market. Unfortunately it is in fairly lonesome company.

UK PMI - 48.6 in June, up from May’s three-year low of 45.9. Joins France in at least not making a lower low in the current trend. Once again we have another economy rapidly eating into backlogs as new orders fall. An overall slowing in demand from abroad finally began to kick-in last month because of overpriced sterling.

German PMI - fell from 45.2 in May to 45.0 in June, its lowest reading for three years. What is most surprising to me is that New Export Orders are significantly in contraction - despite Germany's strong line of products to sell and artificially weak currency. Such is the drop-off in demand from other European countries it seems. The trend is certainly ugly, and how much worse it would be if Germany was selling goods priced in deutsche marks.

Greek PMI - posted 40.1 in June, down from 43.1. The Greek economy no longer can be accurately described as a useful indicator for average conditions in Europe, but we continue to monitor progress for divergence between reality and the market's low expectations.

Overall Eurozone Composite PMI - Unchanged at 45.1, which is a little improved from the Flash estimates. The report reflects story we already know in Europe - weak medium term demand in spite of lower input costs.

US Markit PMI (not ISM) - Down to 52.5, lower than the earlier flash estimate of 52.9 and down from 54.0 in May. Worst reading in 18 months, which Markit suggests is more severe than when ISM was at 50.6 last September (and a US double dip was considered likely). Serves to confirm what we would later find out from the ISM Manufacturing report, outlined later in this article.

HSBC China PMI - 48.4 to 48.2, another lower low in the current trend. Inventories of unsold goods increases at highest rate since 2004. According to Markit's report, "A lack of demand was behind the latest deterioration in operating conditions, with total and foreign new orders falling at accelerated rates in June. New export orders placed at goods producers dropped at the steepest rate in over three years. North America and Europe were both cited as sources of new order book weakness".

Brazil PMI - 48.5, down from 49.3 in May, the index was at an eight-month low and signalled a modest deterioration in business conditions. PMI shows clearly the medium term bearish trend starting in April 2012 to present, so far showing no signs of relief.


At Big Macro Picture, you'll hear us talking a lot about the ISM Manufacturing PMI. Original research was conducted into the quality of ISM as a leading indicator by myself (Chief Writer Mark A. Rogers) as part of my economics studies at university, and since then I've followed it closely. I consdier it to be the most important indicator out there for United States, and thus global, economic conditions.

The below image was posted at the excellent Calculated Risk blog which I recommend you check out here: Calculated Risk

It shows how ISM PMI has performed over economic cycles since the 1960s, most notably, "when it peaks" and "when it dips below 50". The last two sustained periods where ISM drifted below 50 were 2007-2009, and 2000-2003. In both cases, the first month in the bull market when ISM dipped below 50, tended to mark the "beginning of the end" for those cycles. While no single indicator is ever infallible, and economic prospects are not always the market's primary concern (note the signals in the 1990s and 1985), we believe the market is currently very interested in the state of the fragile US economy.

Last summer saw sharp declines in US indices when the market began to fear a double dip recession in the United States - the ISM came dangerously close to dipping below 50 but crucially remained above, and the US economy continued to grow. This summer, is it fair to say that the LONG TERM 2009-present bull phase is under threat? We believe that to be the case.

The ISM fell from 53.5 to 49.7, but most startling were the report's other components:

PMI 49.7
New Orders 47.8
Production 51.0
Employment 56.6
Supplier Deliveries 48.9
Inventories 44.0
Prices 37.0
Backlog of Orders 44.5
Exports 47.5
Imports 53.5

New Orders and Production are amongst the most interesting leading components of the report - often having predictive value for future PMI reports. With New Orders dropping from 60.1 to 47.8 on the back of a dramatic drop off in Export Orders, the slowdown overseas has finally found itself on American shores.

While we await confirmation in the coming months' reports, we are now materially concerned with the health of the global economy.


An interesting report released yesterday was the JP Morgan/Markit/ISM Global PMI. This factors in the forward-looking growth of every major economy in the world, to produce an impression of worldwide economic conditions.

Global PMI Report 

It neatly summarises the contents of the other PMI reports. As a result of this month's surveys, we now know that the United States (ISM), Japan, China, Germany, UK, France, Italy and Brazil are showing contractionary conditions, for the first time since 2008-2009. India and Russia have yet to follow that trend. Global PMI, Global Output and Global New Orders are all in contractionary territory, and while Europe dragged the global index below 50 briefly in 2011, this time the contraction is felt broadly in each of the world's major economies.


  • Weak Global Demand/New Orders felt in each of the world's major economies, including United States for the first time since the 2009-present LONG TERM bull phase began. We cannot yet conclude that this will mark the end of this current bull phase, as the market might brush aside the growth concerns and the indicators may pick up again before the impact is felt in company earnings. However, this is the most concerned we have been for the health of the 2009-present bull phase since the recovery began.
  • Dramatic Reduction in Input Costs almost a unanimous feature in each of the PMI reports, courtesy of reductions in oil and industrial metal prices. This comes with the usual conundrum for investors in inflation-sensitive securities. A sign of real lack of inflationary pressure on one hand, but on the other hand, a signal to central banks that they can afford to be looser with monetary policy - thus creating future inflation.
  • ... but it Hasn't Eased Pressures on Producers courtesy of an outright lack of demand. We have felt, and still feel, that eventually lower input costs will act as an automatic stabiliser for the global economy -- which was hurt earlier in the year by artificially high oil prices. The story in Germany is interesting - a major global producer of goods, enjoying low input prices and a currency that flatters exporters - still shows terrible New Export Orders due to the weakness in the rest of Europe. A worrying sign.
  • One or Two Bright Spots...? Might be considered as India and Russia (the only remaining major economies with expansionary PMIs), even though Russia's PMI did fall this month, and is an economy likely to suffer from lower oil prices in spite of funds set up to buffer their economy from such events. In terms of MEDIUM TERM analysis, we can also be encouraged that France and the UK did not make lower lows in the current trend for PMI -- although the majority of the reports, as you can see above, did exactly that.

At Big Macro Picture, we are not fans of dramatic, sensationalist arm-waving over global economic growth. We have been bullish on the LONG TERM timeframe since 2009, when the above data showed clear signs of improving into expansionary territory and the market was still in decline. Naturally, as this data now moves from expansion towards contraction, we have equal reason to be cautious on the LONG TERM cycle, as well as the MEDIUM TERM bearish cycle that began in March/April.

Our strategy is to use this current SHORT TERM bullish run (June onwards) to position and protect our LONG TERM and MEDIUM TERM portfolios from the risks of further declines in 2012. We will watch for signs of that trend reversing, noting that failure to make new higher highs in 2012 would be particularly worrisome for this present cycle.

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