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Monday, December 03, 2012

Fed Watch: Apples and Oranges in the Manufacturing Data?

One more from Tim Duy:

Apples and Oranges in the Manufacturing Data?, by Tim Duy: Reporting on today's spate of manufacturing numbers, Neil Irwin at the Washington Post writes:

Just a few months ago, the global economy seemed to be stuck in a precarious state. Huge swaths of the world economy were either slowing down or contracting outright, and it wasn’t at all clear whether global economic policymakers would have enough gas left in their stimulus tanks to stop things from spiraling into a bad place.

But the latest data in a wave of reports on the manufacturing sectors in nations around the world overnight and Monday morning suggest that the world has avoided that fate. The same cannot be said of the United States, however.

I appreciate Irwin's point - many of the global manufacturing reports were better than expected, although I would say only marginally so. And I think this is accurate:

But put it all together, and the portrait painted by the manufacturing reports is of a world economy that isn’t going off the rails. China’s slowdown over the summer was not, so far at least, the start of any broader economic collapse. Europe’s recession is bad, but major European economies aren’t in free-fall. Mario Draghi, president of the European Central Bank, said in an interview with Europe 1 radio Friday that a euro-zone recovery “would start probably in the second half of 2013.” The new numbers Monday seem to fit that forecast; contraction remains underway for now, but the pace of that contraction is slowing.

The European Central Bank has so far prevented a free fall on the continent; whether or not recovery is at hand or the region is faced with a long, grinding period of zero growth remains a subject of debate. Europe's fate will be decided, I suspect, by a lack of fiscal stimulus. As far as the persistence of the recent uptick is concerned, take quick look at the Markit Eurozone PMI:


Notice the upswing in 2011 that was subsequently reversed. Perhaps the same dynamic will happen this time as well?

Where Irwin trips me up is here:

All of which brings us to the United States. The Institute for Supply Management’s purchasing managers’ index fell sharply, to 49.5, from 51.7 in October. The details of the number were simply terrible. The actual level of production activity at American factories actually rose, but new orders fell 3.9 percent, which bodes ill for the future. The employment component of the survey fell to its lowest level since September 2009, which is hardly an optimistic sign for the November jobs numbers due out on Friday.

This is all true, in my opinion, but I am wondering if this is an apples to oranges comparison? Irwin shifts from the Markit PMIs to the ISM PMI data. What was the Markit PMI for US manufacturing? Up, not down as the ISM reported:


What about the underlying details?


In many ways this is almost the mirror image of the ISM report! What's down is up! Headline, new orders, new export orders, and employment all move in opposite directions. Which leads one to wonder which is correct, the ISM or Markit PMI? If ISM is correct, then is Markit also overestimating the strength of manufacturing elsewhere? Honestly, I don't know, but it makes me hesitant to compare the Eurozone Markit PMI to the ISM US PMI to argue that the US is deteriorating relative to Europe.
Bottom Line: The ISM report on manufacturing is widely followed in the US. It is a natural starting point to understand current trends in US manufacturing. It's what I would do. But should we compare it to the Markit PMI reports of other nations? Yes, but with an important caveat - we shouldn't ignore the Markit US PMI data when making such comparisons, especially when it stands at odds with the ISM data.

    Posted by on Monday, December 3, 2012 at 09:36 PM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (6)


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