Global PMIs and Fed Policy: they’re linked
Today a host of global purchasing managers indices (PMIs) reiterated that the global economy is slowing….quickly.
Within 24 hours, China, the US, and the euro area all reported July PMIs falling toward the feared 50 (below which the manufacturing industry is contracting) – 50.7, 50.9, and 50.4, respectively. The UK PMI fell below 50 to 49.1 in July.
I would posit (and I believe that others have, too, like Edward Hugh) that this is directly related to Fed policy, specifically that of quantitative easing (QE).
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The chart above illustrates the stated PMIs alongside the dates of a shift in the Federal Reserve’s QE policy. The shorter bars indicate those dates when the Fed ended QE and announced that it would reinvest maturing proceeds. On the other hand, the full bars illustrate the outset of QE.
Falling PMIs correlate with the end of QE. New QE correlates with a rebound in global PMIs. Given this correlation and the latest GDP release, I expect that talk of QE anew to surface.
Rebecca Wilder
I don’t know, 3 months into a rising PMI before the 2nd QE is marked and 3 months into a decline before the 2nd QE is marked as over. The first one seems to have done it’s job, but…
How do we know ther QE helped to raise the PMI and not just cause it to spike higher than it had been for 2006 and the decline is not just the PMI returning to normal vs the end of QE?
Whole business can’t happen if there is no sustained, never mind rising retail sales.
It all starts and ends with the consumer and their share of income/productivity.
Katarzyna Komorowska, an editor at FX Street, says that we can expect no changes in monetary policy in Europe. So, no help there.
Emily Knapp of Wall St. Cheat Sheet rounds out part of the global picture, advising on the status of India, Taiwan, and South Korea:
“Factories in India continued to expand in July, but at their slowest pace in 20 months, dropping from 55.3 in June to 53.6 in July. According to HSBC, new export orders fell at their fast pace in the last 29 months. Taiwan’s new export orders fell for the first time in nine months, and the manufacturing sector contracted at its fastest monthly rate since January 2009. Conversely, South Korea’s rate of expansion actually increased in July for the first time in seven months on increasing new export orders.”
And Credit Swisse discusses the risks to Asian economies.
Robert Prior-Wandesforde, director of Non-Japan Economics at Credit Suisse, hammers the monetary tightening throughout Asia saying, “The fact is across Asia we’ve now seen a fairly significant tightening of monetary policy, not in Singapore but certainly in China, India and so on. That means we are going to see weak economic activity through the course of this year, and probably through the course of next year as well.”
Edward Hugh wrote two excellent pieces on QE on October 16, 2010 and June 5, 2011. In the June article, Edward explains:
“Let’s remind ourselves what the problem really is. The problem is debt and indebtedness, and in particular private sector debt, in a number of key developed economies (especially the US, The UK and Spain). Somehow or another (possibly we should blame Greece) this whole situation has morphed in people’s heads into a public sector indebtedness problem. Of course, the huge deficits which were created in the initial attempts to fight the crisis helped reinforce this idea, as did the view (propagated by those on the other side of the fiscal stimulus fence) that all that was needed was time, and then the ship would automatically right itself again. But it hasn’t and it won’t. So more is needed, more stimulus (of one kind or another), more imagination and more ingenuity. What isn’t needed is another bout of deficit spending of the kind we have just had, which simply enabled things to mark time, and lots of people to remain in denial.”
Ed closes, saying:
“Maybe it seems peculiar to be arguing that policy in the Federal Reserve should be partially conditioned by policy failures in countries like Italy, Spain and Greece, but such is the nature of the inter-connected world we live in. Certainly Europe needs to get its act together, and to start sorting its mess out to get the rest of the world back from the precipice. As Robin Harding so eloquently reminds us, “the rich world’s recovery from the Great Recession began two years ago. It is dispiriting that we still face sovereign debt crises and soft patches. But just as a war is more likely to be lost from a collapse in morale than a defeat on the battlefield, the only way that the world economy is likely to succumb to another recession is if policymakers lose the will to fight it”.”
And this week, Maria Laura Lanzeni of Deutsche Bank Research raised the issue of the potential fallout of the EU crisis with her article, “Emerging Markets: Contagion from trouble in the eurozone has not been widespread. Will it remain like this?”
So, the U.S. Federal Reserve is expected to soften or solve all of the the global and domestic problems by whipping up QE3?
If they want a weaker real exchange rate they will. In my view, the only way out of this for the US economy is a long hard slodge to real depreciation. Barring some miraculous fiscal stimulus on the part of Congress – clearly an impossibility at this point – the US economy will be growing (according to economists) roughly on par with or below potential, that is if the private sector doesn’t back off. And it’s not completely clear that continued expansion is even guaranteed at this point, given where the labor market is (not).
QE gets too much credit, in my view. But fiscal policy is all but dead – that’s too bad, since it’s the only sure-fire way to drive domestic demand.
Rebecca
Yes, Edward Hugh is very good.
Dan, I would agree about starting and ending with the consumer. But without jobs growth that impetus cannot be counted on. I’ll continue to hope for some miraculous transfer from corporate profits to working wages and salaries; but until then, policy’s all we’ve got.
Clearly, there’s no formal model here – and I understand that there’s a lot in play here. However, teh correlation is quite striking. The causation bewteen US Fed policy and Chinese PMIs it’s pretty simple: lax monetary policy in the US transmits directly to a managed currency regime (anything that’s pegged or quasi-pegged to the USD).
The correlation (possible causation) from US policy to European PMIs it’s direct via any effect that QE has on the US market (the stimulus brings import demand, which then passes through to Germany exports). Or it’s the indirect route via Asia. US policy stimulates Asia, which then demands goods from Germany and Europe.
Either way, I think that there’s a good case to be made that the printer of the world’s reserve currency creates global liquidity and stimulus.
Rebecca
Rebecca,
Did you read the IMF Spillover report on the United States released on July 22? Interesting comments regarding QE2.
http://www.imf.org/external/pubs/ft/scr/2011/cr11203.pdf
Other reports on the United States and the IMF are here:
http://www.imf.org/external/country/USA/index.htm