Global manufacturing PMI survey results for October are consistent with the base case scenario here of a progressive loss of momentum through end-Q1 2022, at least.
PMI new orders have moved sideways for two months but export orders and output expectations fell further last month, to nine- and 12-month lows respectively – see chart 1.
A striking feature of the survey was a further rise in the stocks of purchases index to a 15-year high – chart 2. Stockpiling of raw materials and intermediate (semi-finished) goods has been supporting new orders for producers of these inputs but the boost will fade even if stockbuilding continues at its recent pace, which is very unlikely. This is because output / orders growth is related to the rate of change of stockbuilding rather than its level.
Chart 3 illustrates the relationship between new orders and the rate of change of the stocks of purchases index, with the coming drag effect expected to be greater than shown because of the high probability that stockpiling will moderate.
Stockbuilding of inputs has been particularly intense in the intermediate goods sector – chart 4. This suggests that upstream producers – particularly suppliers of raw materials – are most at risk from relapse in orders. Commodity prices could correct sharply as orders deflate – see also previous post.
A similar dynamic is playing out in the US ISM manufacturing survey, where new orders fell last month despite the inventories index reaching its highest level since 1984, resulting in a sharp drop in the orders / inventories differential – chart 5. The survey commentary attributes the inventories surge to “companies stocking more raw materials in hopes of avoiding production shortages, as well as growth in work-in-process and finished goods inventories”.
The combination of an ISM supplier deliveries index (measuring delivery delays) of above 70 with new orders in the 50-60 range has occurred only four times in the history of the survey. New orders fell below 50 within a year in every case.
The global PMI delivery times index (which has an opposite definition to the ISM supplier deliveries index, so a fall indicates longer delays) reached a new low in October but a recent turnaround in Taiwan, which often leads, hints at imminent relief – chart 6. The view here is that current supply shortages reflect the intensity of the stockbuilding cycle upswing, with both now peaking.
The global manufacturing PMI new orders index – a timely indicator of industrial momentum – registered a surprise small rise in September, with weaker results for major developed economies foreshadowed in earlier flash surveys offset by recoveries in China and a number of other emerging markets.
Does this signify an end to the recent slowdown phase, evidenced by a fall in PMI new orders between May and August? The assessment here is that the rise should be discounted for several reasons.
First, it was minor relative to the August drop. The September reading was below the range over October 2020-July 2021.
Secondly, the increase appears to have been driven by inventory rebuilding. The new orders / finished goods inventories differential, which sometimes leads new orders, fell again – see chart 1.
Remember that orders growth is related to the second derivative of inventories (i.e. the rate of change of the rate of change). Inventories are still low and will be rebuilt further but the pace of increase – and growth impact – may already have peaked.
Thirdly, the recovery in the Chinese component of the global index was contradicted by a further fall in new orders in the official (i.e. NBS) manufacturing survey, which has a larger sample size. The latter orders series has led the global index since the GFC – chart 2.
Fourthly, the OECD’s composite leading indicators for China and the G7 appear to have rolled over and turning points usually mark the start of multi-month trends. The series in chart 3 have been calculated independently using the OECD’s published methodology and incorporate September estimates (the OECD is scheduled to release September data on 12 October). The falls in the indicators imply below-trend and slowing economic growth.
Finally, additional August monetary data confirm the earlier estimate here that G7 plus E7 six-month real narrow money growth was unchanged at July’s 22-month low – chart 4. The historical leading relationship with PMI new orders is inconsistent with the latter having reached a bottom in September. The message, instead, is that a further PMI slide is likely into early 2022, with no signal yet of a subsequent recovery.