Last week, we received the S&P Global Flash PMI data for the month of August. This data has historically been a good leading indicator for business activity that ties into important macro measures that are released on more of a lag. When reviewing this data, it is important to note that a reading below 50 indicates contraction. At the composite level, PMIs declined in the United States, United Kingdom, Euro Area, Germany, France, and Australia. Looking at just the United States, the composite index has declined in three consecutive months to 50.4. Other major countries, excluding Japan, have followed a similar path. Collectively, this is likely an indication of a slowdown in demand, which is not a good sign for global economic activity moving forward.
“Companies reported that demand is looking increasingly lethargic in the face of high prices and rising interest rates. A resultant fall in new orders received by firms in August could tip output into contraction in September as firms adjust operating capacity in line with the deteriorating demand environment. Hiring could likewise soon turn into job shedding in the coming months after a near-stagnation of employment in August.”
– S&P Global Market Intelligence (August 23, 2023)
Underneath the composite index, manufacturing PMIs in the United States, United Kingdom, and Australia moved deeper into contraction in August. The Euro Area, Germany, France, and Japan increased m/m, but remain in contraction. The depth and breadth of contraction is particularly concerning in terms of what it means for the direction of global demand and economic activity.
The services data for the second half of 2023 was supposed to improve, but that has not occurred through the first two months of Q3 2023. In fact, the Euro Area, Germany, and United Kingdom joined France and Australia below the contraction line. Following a similar path, the United States has declined for three consecutive months to 51.0 in August. If a second half rebound was, at least in part, predicated on services strength, this PMI data does not confirm that view.
If these trends in PMI data continue to weaken or remain in contraction, we would expect to see a likely continuation of the downward trend in global economic activity.
The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance. The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.
Senior Economic Analyst
Boyd Watterson Asset Management, LLC