2/2/17: Global Manufacturing PMI Continues to Signal Potential Growth Recovery in January

Market published Global Manufacturing PMI (Purchasing Managers Index) for January, showing that growth conditions in global manufacturing at the start of 2017 have matched those prevailing in December 2016, with both months posting a PMI reading of 52.7, which is:

1. Statistically above 50.0 (signalling statistically significant expansion in the sector);
2. Statistically above 51.4 - the long run average; and
3. Current reading ties December 2016 reading for a 34-month high and 51st consecutive month of above 50.0 readings.

Some important details from Markit release are:

• “The improvement in business conditions was led by the investment goods sector, where the PMI rose to its highest level in over five-and-a-half years.” This suggests that the globally depressed capex cycle might be turning to the upside, finally, after years of subdued capita investment by companies;
• “The improvement at consumer goods producers was slightly better than that seen in December, while growth in the intermediate goods category lost some momentum.” This suggests that current outlook is for improved short run consumer demand, but a moderation in previous expectations about future growth in demand might be afoot. 
• Growth was concentrated in the US, the euro area and the UK, but slowed in Japan. South Korea, Brazil, Turkey and Greece were “the only nations to register contractions.”
• “…the rate of growth in new business intakes accelerated to a two-and-a-half year high. Part of the increase in demand reflected stronger international trade flows, as new export orders rose at the quickest pace since September 2014.” This fed into “a further increase in outstanding business during January. Backlogs of work expanded for the eighth consecutive month, with growth registered across the consumer, intermediate and investment goods categories.” This is consistent with my view - expressed earlier - that going forward, expectations of future growth in final demand might be moderating.

Additionally, “the latest release sees the launch of a new index tracking business sentiment – the Future Output Index – that is based on a question asking companies if they expect output to be higher, the same or lower in 12 months’ time. The start of 2017 saw positive sentiment climb to a 19- month high, with improvements seen in the US, the euro area, Japan, the UK, India, Brazil and Russia.” I would not hold my breath for the robustness of this indicator for quite some time, as we need to see more historical data building up to assess just what exactly does it tell us about the sector activity.

As the chart above clearly shows, we are only inching toward late-2009-mid 2011 levels of activity, although we have now breached 2015-mid-2016 doldrums trend.

Overall, the data is a welcome news for the global growth, but we will have to wait and see for China and Indonesia Manufacturing PMIs to come out to see more robust picture of what is happening in global trade and manufacturing trends. We also need to see if the current levels of growth can be successfully breached to the upside in February-March. January is, overall, a challenging month to base one’s assessment for broader 1Q economic performance signals due to shorter range of working days and lags from December feeding into January numbers.