November Economic Read

• Early indications are that October was another month of slow but positive growth in the U.S. and abroad. The monthly nonfarm payroll number for October was the strongest of the year, suggesting that weakness in August and September’s numbers was just noise. Emerging markets continue to be a small drag on the U.S. economy, but there are no signs of a crisis at this point. On the monetary policy view, the Fed continues to prepare the markets for tightening, perhaps at the December meeting.
• At 271,000 new jobs, the month-to-month change in nonfarm payrolls released in last Friday’s employment report was the strongest of the year. In addition, the year-over-year change in wages was as strong as it has been since the crisis, up 2.5% year-over-year. We can hope that wage gains hint at more of the economy’s gains accruing to average Americans to build a firmer foundation for a sustainable recovery. It is worth noting that as the expansion ages we can expect monthly employment gains to moderate and to see strength in the labor market represented as additional wage growth.
• On the international scene my view continues to be fairly strong growth in the developed world and faltering growth in the emerging world. Below, I plot the Purchasing Managers’ Indexes for the major international economies. For China (the epicenter of current concern) the PMIs stopped falling in October, though only time will tell if this level will be followed with renewed expansion or further deterioration. The economies most associated with exporting intermediate or raw goods to China (Australia, Taiwan, Hong Kong, Korea) continue to show contraction in the their PMIs. Indeed, these countries are seeing expectations of 2016 growth marked down. At the same time indexes ticked up in the Eurozone, the UK and Japan last month and a GDP-weighted average PMI increased in October.

International PMI heatmap

Source: Bloomberg, Markit, Astor calculations

• The Fed renewed its hold on investors’ attention last week with Chair Janet Yellen announcing the December meeting could mark the first raise in rates since 2006. Many of us are hopeful that whatever the other consequences, the first hike will at least mark the end of our long purgatory of waiting for the first hike. Focus should shift to the pace and ultimate extent of rate hikes. Given the uncertainty about the amount of slack in the labor market and inflation below target, I expect rate hikes to be much more gradual than in the 1999 or 2004 cycles. In addition, the FOMC members (who have consistently been too bearish in their rate forecasts since the crisis) currently see Fed Funds rate topping out at about 3.5%, well below previous cycles. Perhaps the tightening could be as modest as a two-year long move to a 2% Fed Funds rate
• Why is the Fed interested in rising rates? The FOMC seems to believe the labor market is close to full employment and that core inflation should move back to its 2% target in the next two years or so. Given the uncertain lags associated with monetary policy, the FOMC believes it is best to start to act now.
• Overall, I view the information released in the last month as supporting a slightly more optimistic take on U.S. growth.

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World PMIs January 2015 – Widespread softness

Looking at the worldwide Purchasing Manager’s Indexes (most surveys conducted by Markit) we can see widespread softness, though levels still show expanding manufacturing orders. We are still seeing PMI levels showing decent growth in the US and, less convincingly, in the rest of the world.

The US, UK, Canada, China and Japan all show lower PMI readings compared to three months ago, with the Eurozone looking a little brighter.   Part of the weakness is likely related to the oil slowdown as it seems plausible that oil producers would cut orders faster than firms benefited by lower energy prices would add equipment.

Chart 1 shows a heatmap, with countries in rows and dates in columns. The redder the cell the worse the reading, the greener the cell the better with a sort of muddy brown around 50 line indicating stable orders. Note that the US and China have two surveys (conducted by different organizations) each.


Chart 1- PMI heatmap.  Source: Markit, Bloomberg

Chart 1- PMI heatmap. Source: Markit, Bloomberg

The largest drop this month was in Switzerland, related to the shock rise in the Swiss franc against its main trading partner, the euro. Switzerland is almost at the depressed levels of Russia, which has struggled under numerous negative shocks.

One flaw with this sort of heatmap is that it makes every country seem equally important. Making the row heights a function of GDP is possible but makes the chart hard to read. Instead, in Chart 2 I will pull out just the Markit PMIs for US, China and the Eurozone. Here we see a modest weakening over the last three months, though not the sharp drop usually coincident with a recession.


Chart 2- Markit PMIs for three important economies.  Source: Markit, Bloomberg

Chart 2- Markit PMIs for three important economies. Source: Markit, Bloomberg

The final chart sums all countries and weighs by their GDP. Again we see weakness worth noticing, but not the signs of a broad global downturn.

Chart 3-  World GDP weighted PMI.  Source: Markit, Bloomberg, Astor calculations.

Chart 3- World GDP weighted PMI. Source: Markit, Bloomberg, Astor calculations.


Overall, at Astor we are perhaps slightly less optimistic about the US economy than we were a few months ago, and nervously watching the rest of the world.  Nevertheless we consider as growth in the US and the world at large the most likely outcome for 2015.

No good news in the preliminary Markit PMIs

As always, the Markit Purchasing Managers Indexes are some of the first data we receive about a month. The November preliminary readings came out today and from the perspective of the global business cycle, it is hard to find good news in there. All the PMIs released were lower than their final number for October. The upticks we saw in the Eurozone and China appear to have been reversed.


Source: Markit, Bloomberg, Astor calculations

In the heatmap above bright green shows the US as the strongest market, consistent with its place throughout the year and with what most analysts are expecting for 2015.   The muddy colors of Europe show most around the 50% expansion /contraction line, with France setting a new low for the year. Interestingly, There does not seem to be much evidence of deterioration in Japan over the last six months, giving hope that the two consecutive quarters of negative growth will soon be reversed

The time series below shows a different view of the big three, US, Eurozone and China. All off their recent highs and the Eurozone and China close to the contraction line.


Source: Markit, Bloomberg, Astor calculations

I am concerned we will see additional deterioration in coming months, though there is currently no sign of a dramatic plunge in manufacturing activity.

World PMIs (October 2014, preliminary) – steady as she goes

The October preliminary Markit PMIs for major economies were somewhat stronger, on balance, than September’s. The US is off its peak but still quite strong. The Eurozone recovered a bit, thanks to Germany is my guess, though the reading is still around the 50% expansion/contraction line.


In Asia, Japan’s manufacturing PMI posted solid progress and China registered little change.

Overall, the preliminary PMI’s suggest to me no significant changes in global economic growth: Fairly strong in the US, moderate in Asia, weak but positive in Europe.

World PMI update for August – Weakness in Europe

With the flash update for selected Markit PMIs for August, here is our monthly heatmap of worldwide manufacturing PMIs.


A few observations:

  • The Markit PMI for the US jumped to its highest level since 2011. While this is an encouraging sign, the link between the Markit measure and the more familiar ISM measure is not as strong as you would imagine, and we see this as confirming the strength we saw in July’s ISM release.
  • We were beginning to get concerned about Europe last month and that concern continues this month. France’s PMI is at a 15 month low and all of the big four Eurozone countries show month on month declines, though only France is below the 50 line showing that most companies are experiencing declining business conditions.
  • China continues to oscillate around the expansion / contraction line but the strength in the rest of Asia makes us hopeful. In particular, on this measure at least Japan seems to be emerging from its post VAT increase slowdown.
  • World PMI Update: Weakness in Europe?

    Manufacturing growth throughout the world increased at a solid, if unspectacular pace in July, the preliminary releases of the Markit PMIs show. The chart shows manufacturing PMIs across many of the more important countries in the world, the rightmost column, July 2014, is the preliminary data released July 24.
    The highlights of the July data:

  • The US Markit PMI (top line in the chart) fell slightly. The relationship between this reading and the more familiar ISM PMI is uncertain, and it is best to think of these numbers as two different noisy readings of the same phenomena. At Astor, our assessment is that the US economy continues to expand
  • The rate of growth increased in China to a new high over the rolling 12 months. There is still concern about the outlook for Chinese growth this year.
  • The French PMI has fallen four months in a row to concerning levels, the lowest in Europe according to this selection of countries.
  • A few points about broader trends:

  • There may be some weakness showing up in Eastern Europe. It is not clear if this is directly to do with the tensions in the Ukraine this year, but the data we have is all for June, not reflecting the recent deterioration. For a more positive take on European growth see this Bloomberg report.
  • South Korea has been slowing a bit too, as the government recognized with a stimulus package
  • In conclusion, no major changes to our assessment though the Investment Committee continues to keep a concerned eye on the details of growth in Europe.

    World PMI Update: US shows strength, concerns about Asia


    The chart shows manufacturing PMIs across many of the more important countries in the world, the rightmost column, May 2014, is the preliminary data released in the last week of May. While manufacturing in the developed world is not what it once was, at Astor our sense is that the business cycle tends to play out first in the manufacturing sector, and tends to spread to the service sector later. Hence, we keep a close eye on the PMIs. Our impressions of the current situation:

    • US manufacturing continues to be a bright spot in absolute terms and steady at higher levels than a year ago.
    • On the whole, Europe is much improved compared to the previous year. The UK seems to be holding strong a high levels and the Eurozone countries seem to be, for the most part, much improved over last year with positive.
    • Asia is an area of concern. While China’s PMI is up slightly over the previous three months, it is still at a low level as are many of the countries in the region. Most of the rest of the region appears to be decelerating. Australia’s drop stands out, but we are guessing it will be partially reversed.
    • The rest of the emerging world paints a picture of modest expansion.

    We will update if the picture changes with the release of the final numbers next week.

    John Eckstein