There is No Recovery

05/21/2020 9:17 am EST


Landon Whaley

Editor, Gravitational Edge

Despite the recovery in stocks, global PMI data shows there is no economic recovery occurring anywhere, reports Landon Whaley.

In these unprecedented times, it is important to stay focused on what’s real.

We track thousands of data sets globally, but few provide better insight into economic growth while also providing a true apples-to-apples comparisons across economies like the global manufacturing Purchasing Managers’ Index (PMI) surveys.

For the uninitiated, the critical threshold in a PMI report is the 50.0 level. If an economy’s PMI is above 50.0, then growth is expanding, below 50.0 its contracting. There are four possible PMI scenarios, and each one tells us something different about the trajectory of growth, and as importantly, the likely central bank policy response to current economic conditions.

A PMI reading that is greater than 50 and accelerating month-after-month says the underlying economy is in a Spring or Summer Fundamental Gravity, and central bankers just need to sit on their hands and not screw it up. Based on April data, not a single economy falls into this particular PMI camp.

Scenario two is an expansionary reading above 50, but with a multi-month downtrend indicating that the economy is still growing but steadily losing steam. In this PMI environment, the economy is doing just fine. Nevertheless, you start hearing rumblings that the central bank may need to step in to keep growth pointed in the right direction and everything humming along, economically speaking. Based on the latest reports, Israel, New Zealand, Nigeria, and Puerto Rico fit this bill.

Once you drop below the magic 50 mark, the PMI is indicating an outright contraction in growth.

In scenario three, the PMI is contracting and has also been declining for several months, indicating a solid downtrend in growth. This environment characterizes an economy that is pure guano where investors are clamoring for central bankers to cry dovish and cut rates to the bone. The economies currently facing this PMI scenario are Australia, Brazil, Canada, China, France, Germany, Greece, India, Indonesia, Italy, Japan, Malaysia, Mexico, Russia, Singapore, South Africa, Spain, Taiwan, Thailand, the United Kingdom and the United States.

Which brings us to our fourth and final PMI scenario, an economy that is in contraction, but is making its way back up towards the 50 level. Against this economic backdrop, growth has found a floor, and with continued monetary policy support, it will likely accelerate back into expansion territory. Here again, based on recent data, not a single country passes the mustard.

More importantly, in terms of global GDP, the PMI scenario breakdown paints a vivid picture. No countries are experiencing PMI Scenario #1— Everything is Awesome. There are just four economies (representing only 1% of global GDP) in Scenario #2, where Everything is peachy. Every country that is a meaningful contributor to global activity (accounting for over 99% of GDP) finds itself in PMI Scenario #3— Everything is Guano. Finally, not one economy on Earth is in scenario #4, affectionately referred to as “I’ve fallen, but I’ve gotten back up.”

Also of note, 26 of the 32 economies included in the most recent PMI data posted their worst level of contraction ever. Ever, my friends, is a very long time.

Folks, I don’t know why anyone is discussing a V-shaped recovery, or a recovery resembling any other letter of the alphabet. A recovery first requires that economic growth finds a floor and stops falling.

The PMI data doesn’t lie, and it's telling you in no unequivocal terms we are still solidly on the downward slope towards the abyss. Global growth hasn’t bottomed, there is no recovery in play, and you can darn well expect more downside from here.

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