Global Recession?

IS GLOBAL RECESSION ALREADY HERE BY PMI COUNT?

A technical term that has frequently flashed out by media reports of late is Purchasing Managers’ Index, or PMI in abbreviation. 

The reports generally refer PMI scores of a region or country to infer whether its economy is improving or otherwise. They refer to the set benchmark of 50 points – above 50 indicates there is expansion and below 50 signals contraction. But apart from mere general descriptions, not many people really comprehend the mechanisms of PMI.

PMI data are the results derived from surveys conducted with relevant parties in supply management and purchasing professions. The Institute for Supply Management (ISM), founded in 1915, is the key organization for compiling PMI findings for the US. It releases regular reports at the beginning  of each month. For PMI outside the US, Markit Group is the predominant source. Other similar operators are, for example, IFO in Germany, Bank of Japan, the Chinese Government (PMI for China).

While Manufacturing PMI is mainly perused to gauge the sentiments of the manufacturing sector, it is also perceived as reflection of the overall economic standing. The logical premise is that if manufacturing is expanding, the economy at large should also trend likewise. Many economists closely watch PMI scores to forecast their GDP growth estimates.

An index of above 50 represents that the sector in question is expanding compared to previous month. The 50-point mark depicts the neutral level, i.e. no change from the previous month. The pace of expansion can also be recognised by comparing with previous month’s score. If the current figure above 50 is higher than previous month’s, also above 50, that means expansion is at a faster rate. Conversely, if the expansion figure is lower than previous month’s, we could interpret that the economy is growing at a slower rate.

PMI is a composite of five (5) key sub-indicators, viz. 

·         New orders from customers.

·         Production level.

·         Employment level.

·         Supplier deliveries.

·         Inventories.

Higher weightage is accorded to new orders because this sub-indicator relates most to economic agility levels.

Now, let’s look at some latest PMI scores of various significant economies.

• US Manufacturing ISM : heads into contraction

US Services ISM:  expansion trend lower.  

Now, we turn to Europe power house: Germany and France

·         Germany Manufacturing PMI:  Sharpest drop in new export orders since November 2011. 

 

• Germany Services PMI: Contracts

 

France Manufacturing PMI:  Contracts at fast rate

(Above: France Services PMI: Outstanding business fell for 6th successive month in June)

Next, we have Asia power house : China

China Manufacturing PMI: New orders fell to greatest extent in 7 months.

 

(Above: China Services PMI:  the index measuring trends in overall new work at a ten-month low)

Here come the “rising stars” Indonesia and Brazil :

Indonesia PMI: Is very weak

·        

(Above: Brazil Manufacturing PMI: Output and new orders both decline at strongest rates in eight months)

Look at India and Russia. You can see where the graphs are heading to. Slowdown in expansion appears to be the trend.

Japan. A quote extracted from Reuters’ report is good indication of the scenario there: “The Markit/JMMA Japan Manufacturing PMI fell in July to a seasonally adjusted 47.9 from 49.9 in June. More worringly, 47.9 suggested the sector that includes the likes of camera maker Canon Inc and carmaker Nissan Motor Corp is contracting at the fastest pace since April 2011, a month after the earthquake and tsunami……….” 

Finally, the Global Manufacturing PMI graph below denotes a sharp declining dip to contraction in the past quarter.

Having observed the various PMIs, do you feel global recession has already seeped in? To me, they are tell-tale signs of economic activity sluggishness or doldrums being experienced by the globe at large……..at least for another 1-2 years.  Some may call such a situation as economic slump, some may call it recession. 

Perhaps, the “5 Reasons Why A Global Recession Seems Likely” extracted from a Forbe’s article, posted in June, 2012, may supplement more light:

*Europe, the world’s largest economic bloc, is already contracting at an accelerating pace.

*China is slowing and is unlikely to be as strong a driver of global growth as it was just a couple years ago.

*India and Brazil, two extremely important emerging powers, also are slowing.

*The US economy, although still growing for the moment, cannot achieve “escape velocity”, the necessary growth to produce a self-sustaining recovery.

*The half-life on monetary bailouts is getting shorter and shorter.

I leave to you to form your own opinion.

(Note of appreciation to my friend Chan Cheh Shin for providing me some inputs)