Guest Post by Ned Davis Research
Global manufacturing activity registered a remarkable rebound in June as economies all over the world continued to reopen, following COVID-19 induced lockdowns imposed earlier this year. The global manufacturing PMI surged a record 5.4 points to 47.8 (see chart). Although still below the breakeven level of 50.0, the PMI is at its highest point since January, right around when the COVID-19 pandemic was first impacting China.
Recession end in sight
Our analysis has found that this global index has bottomed a median of four months before global recession end. With this now the second monthly gain in the PMI, history suggests that the global economy could come out of downturn very soon. Furthermore, the last time we saw large sequential monthly gains of this sort was in the first half 2009, also around the time the global economy was coming out of recession.
Equity impact mixed
Indeed, we can all recall that the first half of 2009 also marked the beginning of a very robust cyclical, and secular, bull market in global equities. But robust gains in the PMI haven’t always secured such positive performance.
The global PMI also registered large sequential monthly gains in early 2002. But in that case, global equities were down six and twelve months later. At the same time, another instance where the global PMI posted large successive gains was in early 1999. On that occasion, global equities did continue to rise, up to a year later.
One clear distinction between 2009 and 1999 versus 2002 is that the former two took place within secular bull equity markets, while the latter was during a secular bear.
If the pandemic is prolonged and inflicts significant long-term damage on the global economy, this could have secular implications. But one powerful argument in favor of the ongoing bull is the massive global monetary and fiscal stimulus, which has increased exponentially since the pandemic took hold earlier this year.
PMI RECOVERING FOLLOWING COVID LOCKDOWNS
PMI components suggest firm recovery
In line with the global aggregate, while still indicating contraction, the output and new orders indexes also registered their sharpest increases on record. Relative to inventories, both on an aggregate and country-breadth basis, new orders have surged, also pointing to signs of recession-end in the near term (see chart below).
There was some good news on the trade front, as the export orders index contracted at a much slower pace, registering a record rebound in June. But, the overall level of the index remains extremely low and just a measly 7% of countries (Turkey and Ireland) are actually reporting outright growth in their export orders.
While the employment index picked up, it did not at the same degree as the other components, suggesting businesses’ hesitancy to rehire its workers. If employment fails to rebound significantly in the coming months, this could stand in the way of a more robust recovery.
But businesses remain optimistic about the outlook, as the future output index jumped a record 6.7 points to 58.7, a four-month high.
MORE SIGNS OF RECESSION-END
Price pressures rising
Input prices picked up for the first time in three months, with more than half of the world’s economies reporting higher costs. Output prices continued to fall, but at a much slower pace, and will likely begin to pick up as demand returns.
The share of economies with expanding manufacturing industries jumped to one-third in June, up significantly from a record-low 0% just two months earlier. Our analysis has found that this breadth measure tends to bottom a median of two months before global recession end. This also suggests a near-term recovery in
the global economy.
The proportion of economies that reported month-to-month gains in their PMIs surged to a record-high 94%. Our measure of monthly breadth tends to be volatile. But readings this high are worth noting since they usually indicate signs of a positive
economic turning point.
China rebound intact
China’s economy, which had gone through its COVID lockdowns and subsequent reopening months before the rest of the world, continued to show signs of pick-up in June.
Its Markit PMI rose 0.5 points, up in three of the past four months, to 51.2, its highest level this year. This improvement was confirmed by the official PMI, which includes a larger share of state-owned enterprises. That index increased 0.3 points to 50.9, a three-month high.
In both surveys, the increase in June was led by new orders. In particular, the new export orders indexes saw sizeable gains, a sign that the rest of the world is recovering too.
Other economies recovering too!
Several economies joined China in positive territory in June. Geographically and by income level, the recovery was diverse.
There were signs of manufacturing growth in Europe, namely in France, Denmark, Ireland, and the U.K. A few large emerging markets, Turkey, South Africa, and Brazil, also surged back into expansion territory. Economies closely tied to China also showed signs of life, including Australia, Vietnam, and Malaysia.
The U.S. came pretty close to expansion, with its Markit PMI jumping 10.0 points to 49.8. But the ISM manufacturing index moved definitively into positive territory, rising 9.5 points to 52.6.
The Philippines, Greece, Russia, and Spain also saw their manufacturing PMIs jump close to the break-even level of 50.
Rounding out the bottom of the ranks was Mexico, Indonesia, Japan, and Switzerland, with PMI readings all below 43.0.
Mexico, with the lowest PMI in the world in June at 38.6, cited ongoing difficulties with restraining the spread of COVID-19.
This content was provided by Ned Davis Research – See NDR Disclosures
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