PMI PMS

Yesterday in The Service Sector in Canada, we examined how the Canadian economy is being transformed from a manufacturing-based economy into a service-based economy, a trend that we showed is impoverishing the nation. Today we discuss PMI numbers and what they mean for Canada and the global economy.

The leading gauge of economic activity is the monthly Purchasing Managers’ Index (PMI) survey put out in the US by the Institute for Supply Management. PMI indices are available for many other countries. The PMI is a diffusion index, which shows the month over month change in activity as a percentage on a scale of 0 – 100. A value of 50 is neutral meaning no change in position. A value greater than 50 on the PMI is indicative of economic growth. A value of less then 50 is indicative of contraction.

Today we have two pieces of news that indicate global economic contraction.

China

Zero Hedge (ZH) (Markets Losing Hope After China PMI Hits 7 Month Low) and Mike Shedlock (China Manufacturing PMI 7-Month Low, Sharpest Decline in New Export Orders Since March 2009) report today that China’s PMI  is contracting. ZH presents the following graphic (click to enlarge):

The blue line is the PMI figure given by Chinese authorities. The red line is the China PMI as calculated by the British bank, HSBC. The chart shows that both sources registered a number below 50 at the end of last year. The HSBC data never went above 50 after that implying a steadily contracting economy. The Chinese numbers recovered but are now showing a steep decline that should take the index below 50 next month.

Official Chinese data on anything is always taken with a grain of salt (see: Turns Out China IS Lying About Everything), so the HSBC numbers are what are quoted by writers. In short, this confirms what other data has been indicating: that the Chinese economy is contracting.

Eurozone

MarketWatch reported today: Euro-zone PMI shows economic activity at 35-month low. They state:

A closely watched gauge of June business activity in the euro zone remained near May’s 35-month low, preliminary estimates from Markit Economics showed Thursday. The Markit euro-zone purchasing managers composite output index matched May’s 46 reading, which means that the June contraction has remained at the steepest level since June 2009.

This data confirms the economic deterioration in Europe that has been apparent from our posts Tracking The Downgrade of Europe (and Others) and Tracking the Next Recession.

Japan

Since Japan is a major manufacturing and exporting economy, Japan’s PMI has global implications. Markit Economics reported on June 5 in Japan: Markit Japan Services PMI, that the May number had fallen from April’s 51.3 to 50.1. In other words, Japan may be stalling despite a weaker yen. (click to enlarge)

The US

The US is important to Canada as its largest trading partner. As such, its economic performance heavily impacts Canada’s. The latest Markit Economics report of June 21, United States: Markit Flash U.S. Manufacturing PMI, shows that the PMI signals weakest manufacturing expansion in 11 months, dropping from 54.0 in May to 52.9 in June.

Canada

We have noted the decline in Canada’s manufacturing sector when we examined the growth of the services sector. We talk briefly below about the importance of commodities in Canada’s economy. However, manufacturing is still an important sector, and its health is important. Given the general trends in global PMI indices to the downside, it is surprising to see that Canada’s has moved up. According to Markit in Canada: RBC Canadian Manufacturing PMI (also the RBC news release of the PMI), at 54.7, up from 53.3 in April, the RBC PMI recorded the strongest monthly improvement since September 2011 and slightly above the historical average for the series (54.3). We do note that the Canadian data is a month behind the latest US data and may have dropped in the interim.

What It Means for Canada

Our first observation is that economists assess economic strength based on manufacturing strength, not service strength, suggesting that services are not considered to be an important part of measuring wealth generation. When manufacturing-based economies slow – and China, Japan, the US and Germany are the big ones –  they consume and import fewer commodities.

There are a group of countries including Canada and Australia that are known as commodity-based economies.The government of New Brunswick noted in a 1999 economic review:

The severe financial problems of East Asia, Japan, Brazil and Russia impacted commodity prices and equity markets worldwide in late 1997 and 1998, with the resulting uncertainty leading to a marked appreciation of the U.S. dollar. With Canada seen internationally as having a commodity-based economy with a high dependence on external trade, downward pressure on the Canadian currency was inevitable.

Wikipedia quantifies the contribution to exports: In 2009, agricultural, energy, forestry and mining exports accounted for about 58% of Canada’s total exports.

As a result, a slowing global economy, particularly in the manufacturing centers, will have a negative impact on Canada’s balance of trade and lead to an increasing economic slowdown.

Update: 20120706

Mike Shedlock reported today that Japan Composite PMI Contracts; China Composite PMI Stagnates. The index dropped to 49.1. Meanwhile, we find Canada’s June PMI increased to 54.8 from May’s 54.7, showing continue strength against a global slowdown.

Update: 20120702

Zero Hedge (ZH) adds: June Global PMI Summary: Euro Area Slowdown Is Beginning To Impact The Rest Of The World. The sea of red just got even redder as Japan, Korea, Norway, South Africa and Taiwan all dropped below 50, i.e., into contraction territory.

In a separate article from Z, European Manufacturing Contracts For 11th Consecutive Month As Unemployment Hits Record, European PMIs remain in severe contraction.

Ireland 53.1 14-month high
Austria 50.1 6-month low
Netherlands 48.9 2-month high
France 45.2 2-month high
Germany 45.0 36-month low
Italy 44.6 2-month low
Spain 41.1 37-month low
Greece 40.1 4-month low

Then ZH reports in the article Houston, We Have Contraction, that the US ISM number for June came out at 49.7, the first contraction signaled since July 2009.

Finally, according to Mike Shedlock and Markit (China Manufacturing PMI Declines 8th Consecutive Month.), we see China’s PMI contracted again in June from 48.4 to 48.2.

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