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Tags: economic | slowdown | global | signals

Economic Slowdown Chatter Intensifies Amid Mixed Global Signals

Economic Slowdown Chatter Intensifies Amid Mixed Global Signals
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Dr. Edward Yardeni By Tuesday, 08 May 2018 09:51 AM EDT Current | Bio | Archive

There has been some chatter lately about a slowdown in the global economy. The evidence seems to be mostly based on PMI surveys.

However, these are diffusion indexes, which means that they are cyclical and trendless.

They typically rise when the economy is improving. However, at some point, more of the purchasing managers who respond to the surveys are bound to say that their business is strong but no stronger than the month before, which starts to bring the PMI back toward 50.

Consider the following:

(1) Global PMI. The global composite PMI edged up during April to 53.8 from 53.3 during March (Fig. 1). The index is down from a recent cyclical high of 54.8 in February. The composite PMI of the advanced economies continues to well exceed the one for emerging economies. The former was 54.4 in April, while the latter was 52.4. However, both have been solidly above 50.0 since late 2017 after showing some weakness during 2015 and early 2016. The outperformance of the PMIs of the advanced economies relative to the emerging ones has been noticeable in both the manufacturing and non-manufacturing sectors.

(2) Industrial commodity prices. The overall CRB raw industrials spot price index has stalled in recent weeks but remains on the uptrend since late 2015, when the index started to rebound after plunging from the second half of 2014 (Fig. 2). It is nearly back to the best levels of early 2014. Its metals component—which includes scrap copper, lead scrap, steel scrap, tin, and zinc—remains on a solid uptrend, with current readings the highest since the summer of 2011 (Fig. 3).

(3) Oil price. The CRB index we use does not include the prices of any petroleum or lumber commodities. The price of a barrel of Brent crude oil has rebounded remarkably from its low of $27.88 in early 2016 to $75.45 yesterday (Fig. 4). That’s especially impressive since US oil field production has soared, going from a recent low of 8.4mbd (using a four-week moving average) during the week of July 22, 2016 to a record high of 10.5mbd at the end of April (Fig. 5). Production also has been soaring in Iran and Iraq, with both near recent highs at 4.4mbd during December (Fig. 6). On the other hand, Venezuelan production has plummeted (Fig. 7).

In any event, the rebound in the price of oil, despite ample global supplies, strongly suggests that global economic activity remains strong. While US imports of crude and petroleum products have stabilized around 10mbd over the past couple of years, US crude and petroleum exports have soared to 7.1mbd at the end of April. That’s twice as much as during late July 2014 (Fig. 8)!

(4) Forward revenues. Also showing lots of global growth is the forward revenues of the All Country World MSCI stock price index (in local currency) (Fig. 9). It bottomed most recently during the week of April 1, 2016. It rose back to a record high during the week of December 8, 2017, and continues rising into record-high territory. Industry analysts collectively are predicting that global revenues will rise 6.2% this year and 4.5% next year.

Drilling down one level, we see that the US MSCI forward revenues has been rising in record territory since March 2017 (Fig. 10). The Developed World ex-US MSCI forward revenues has rebounded back close to its 2014 record high. The same can be said of forward revenues for the Emerging Markets MSCI.

(5) Forward earnings. In my new book, I observe that the business cycle is actually driven by the profits cycle. Profitable companies expand their capacity and their payrolls, while unprofitable ones retrench. Globally, MSCI forward earnings (in local currency) are at record highs in the US and emerging economies (Fig. 11). Developed World ex-US MSCI forward earnings is approaching its 2008 record high.

By the way, the forward profit margin (which Joe and I calculate by dividing forward earnings by forward revenues) has soared to a record 11.8% thanks to Trump’s tax cut (Fig. 12). Also trending higher are the profit margins for the Developed World ex-US MSCI (at 8.6 currently) and Emerging Markets MSCI (7.3). Both remain below their previous record highs.

US Economy: Wages Outpacing Prices. The Phillips curve is dead, or at least it is in a coma. The US unemployment rate dropped to 3.9% during April, the lowest since December 2000 (Fig. 13). Initial unemployment claims fell to 221,500 during the week of April 28, based on the four-week average. That’s the lowest since March 3, 1973. Yet wage inflation, as measured by average hourly earnings for production and nonsupervisory workers (AHE), remains below 3.0% on a y/y basis (Fig. 14).

Actually, the AHE inflation rate is up from a record low of 1.2% during October 2012 to 2.6% as of April of this year. However, Fed economists (especially former Fed Chair Janet Yellen) expected that it would rise to 3.0%-4.0% by now as the labor market tightened. The conventional view was that the shortage of workers would push up wages at a faster pace, which would boost prices. Missing in this simplistic version of the Phillips curve is the possibility that the secular forces of price disinflation—i.e., globalization, technological innovation, and demography—would also keep a lid on wage inflation.

In any event, the widespread notion that real wages have been stagnating for years is just dead wrong. AHE divided by the PCED has stalled at a record high this year (Fig. 15). During March, it was up 0.6% y/y, 9.6% since 2008, and 17.5% since 2000. Wage gains have been outpacing price increases (which have been diminishing in recent years), so workers aren’t pushing for even better pay increases.

Meanwhile, Baby Boomer seniors (like the proprietor of YRI) are refusing to retire even though most of us probably haven’t received any pay raise for the last 10 years. We are happy to be still working. Those who are retiring are being replaced by cheaper Millennials. It’s the circle of life.

Dr. Ed Yardeni is the President of Yardeni Research, Inc., a provider of independent global investment strategy research.

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There has been some chatter lately about a slowdown in the global economy. The evidence seems to be mostly based on PMI surveys.
economic, slowdown, global, signals
Tuesday, 08 May 2018 09:51 AM
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