Pinnacle Activity Ticker
Vol. 280 - Global Manufacturing PMI Signaling a Recession
Manufacturing numbers, from China to Germany to America, contracted severely in the month of July - signalling a global recession is upon us. Not to fan the flames of fear, but the pace of the decline in manufacturing, across much of the world, is unnerving.
The ISM, which is a trade group of US purchasing managers, records manufacturing data used to determine the value of the PMI (Purchasing Managers Index). A reading below 50.0 (for the PMI) signals a contraction in manufacturing. Above 50.0 signals expansion. In June 2012, the US PMI fell below a reading of 50 for the first time since the Great Recession ended over three years ago. It rose only 0.1 to 49.8 in July. Manufacturing has been a key source of growth in the US since the recession ended in June 2009. This latest contraction is disturbing.
Take a look at the 10 Year US PMI Chart Below:
The last time the PMI contracted and stayed below 50.0 for more than a month, we entered the most dramatic economic recession since the Great Depression.
Another PMI reading below 50.0 in August will encourage the Fed to announce further quantitative easing in September.
This is a Global Threat
The US is not alone. China is threatening to contract as its manufacturing activity dropped to 50.1 in July from 50.2 in June. The Euro Zone is a disaster of epic proportions when it comes to manufacturing. When you have the world's three largest economies (the US, China and Europe) all contracting or threatening contraction on the manufacturing front, there is cause for concern.
Courtesy of JPMorgan and Markit in association with ISM and IFPSM
China is growing at its slowest rate in 8 months, whereas the EU and US are contracting at the fastest rate in 3 years. For these reasons alone, we believe central banks will be forced to act within 30-60 days (or risk a global recession).
A lack of decisive action from the ECB and Fed this past week will hurt the markets in the immediate-term. However, the necessity for action (from central banks) to combat the declining manufacturing sector is bullish for commodities.
Below is an excerpt from the August 1, 2012 Edition of the JPMorgan Global Manufacturing PMI™:
"Manufacturing production and new orders both fell for the second month running in July, with rates of contraction gathering pace. International trade volumes, meanwhile, declined to the greatest extent since April 2009.
Job losses were reported for the first time November 2009. With demand still weak and a sharp drop in backlogs suggesting spare capacity is still available, staffing levels could fall further in coming months.
Job creation at US manufacturers eased to a two-and-ahalf year low. Meanwhile, staffing levels in the Eurozone and China fell at the steepest rates since January 2010 and March 2009 respectively. Payroll numbers rose only moderately in Japan, the UK and India, but increased sharply in Canada and Mexico."
Whenever the data begins pointing to a significant global slowdown, central banks have come to the rescue to stave off a crisis for another year (or even less sometimes).
The Euro Zone & UK Are Rapidly Declining
The Euro Zone manufacturing crisis is in hot water and is on the verge of boiling. Furthermore, the UK manufacturing PMI fell to 45.4 last month (from a downwardly-revised 48.4 in June). This is a huge decline which cannot be brushed aside. The UK is officially in a recession as its entire economy is contracting.
The Euro Zone manufacturing sector declined at its fastest pace in three years in the month of July. This is right on pace with America's decline and leads us to believe that if action is not taken, a global recession will develop (in the near-term). The Euro Zone's strongest economy (Germany) posted a very low PMI reading of 43.0. This is a devastating statistic.
The Euro Zone figures also highlight a fall in export orders for manufacturers. It fell at the fastest rate since February 2009. This suggests that August and September could be even worse than June and July (for the Euro Zone manufacturing sector). The system is breaking down.
Germany is the world's third largest exporter with $1.474 trillion in goods exported in 2011. When you consider that exports account for more than one-third of national output, a dramatic decline in this sector, which we saw in July, threatens the entire German economy and the stability of the Euro Zone.
The manufacturing PMI of the Euro Zone fell to 44 from 45.1 in June. Currently almost all of the national PMIs within the region are at levels below 50.0.
This will greatly diminish the tax revenue base as GDP plummets, making deficits even more difficult to repay. The ECB President, Mario Draghi, is not blind to these obvious headwinds, but will need his hand forced before he starts buying up bonds and printing money.
The ECB failed to cut its key benchmark interest rate on Thursday as it was held steady at 0.75%. What's important to take from Draghi's recent comments is that the ECB is moving directly in line with the Federal Reserve in terms of combating this crisis. Low interest rates and central bank bond purchases will lead to higher inflation and higher commodity prices.
Draghi commented that, "Governments must stand ready to activate the EFSF (European Financial Stability Facility) in bond markets. The central bank may undertake outright open-market operations." Draghi is waiting for Spain or Italy to make a request before the EFSF steps in.
Draghi has been bold when commenting that the Euro Zone and its currency is 'irreversible' and that, "The ECB Mandate is ready to do whatever it takes to preserve the euro, and believe me - it will be enough."
"Whatever it takes" means one thing: Print euros to retire bad debt and pray that at some point in the next 5 to 10 years, the European economy invents a new industry so powerful and profound that it transforms every aspect of the regions current economic troubles.
With the ECB and the Fed not announcing further easing this week, August will likely be a weaker month than July for the markets. In late August, investors will start to get excited again about the potential for both central banks to step up and help the fading global economy (which should boost stock prices).
Earlier this past week, the Federal Reserve pledged to take new policy steps, as needed, to promote stronger economic growth and employment. All eyes will be on Bernanke as he meets in Jackson Hole, Wyoming at the beginning of next month (where an announcement is scheduled). At that time, the Fed will update its forecasts for growth, unemployment, inflation and interest rates.
Dan Greenhaus, chief global strategist at BTIG LLC in New York stated (in respect to the Federal Reserve) "They're saying, Hey, things are not good and we're an inch away from easing."
The $267 billion of long-term bonds the Fed is committed to buying by the end of the year, is not enough. These bonds will be paid for from the proceeds of sales of short-term bonds in its portfolio. The Fed is simply rolling over debt in a never ending cycle.
Job creation at US manufacturers declined to a two-and-a half year low. Reported staffing levels in the Eurozone and China fell by the steepest rates since January 2010 and March 2009 respectively.
With all countries scared to death of raising interest rates and battling weakening job markets, there is one likely outcome: Global stimulus. We have to be patient.
Draghi is beginning to sound more like Bernanke with every passing day. It is our belief that he wants nothing more than to begin buying bonds. He just has to convince Germany (whose economy is contracting rapidly) that it is the right course of action. By all accounts, it appears he will lead the ECB and the euro down a very risky, inflationary path; just as Bernanke has with the dollar.
All the best with your investments,