The first purchasing manager indices (PMIs) published in March contain mixed signals on the economic outlook. The US manufacturing and services PMIs both fell; the manufacturing PMI hit its lowest level in five months and the services index fell to a six-month low. Obviously, the composite PMI also slipped (see Exhibit 1 below).
Exhibit 1: Changes in the composite US and eurozone purchasing manager indices during the period between 2010 and 23 March 2017
Source: Markit, BNP Paribas Investment Partners, 27 March 2017
The positive news is that US PMIs are still comfortably above 50, the level that separates growth from contraction. What is more disturbing is the fact that, in general, confidence indicators have surged since the US presidential election, but indicators of real economic activity have lagged.
As I have already noted in previous posts the leading indicators may be right about business sentiment but we struggle to identify a strong acceleration in real economic growth in the US. The business cycle is mature, fiscal stimulus is uncertain and the Federal Reserve is in the process of raising interest rates. So it may be that the recent declines in the PMIs foreshadow a period where leading indicators will come down to more realistic levels.
In the eurozone PMIs defied expectations for modest declines and surged to their highest since 2011, when the eurozone experienced an initial recovery from the financial crisis. France and Germany, the only countries for which PMIs have been published so far, saw improvements in both the manufacturing and services sectors. As in the US, the PMIs in the eurozone may paint an overly rosy picture, but at least there is room to grow. Gross domestic product (GDP) has only just surpassed its 2008 peak, pointing to a positive output gap. Business investment is low relative to GDP and unemployment is still high. We are more optimistic about the eurozone’s growth prospects than about those of the US. Our positive view on the eurozone was confirmed by the strong reading of the German Ifo index, which in March jumped to its highest since July 2011.
Japan has so far only published its manufacturing PMI. This slipped, but it is still higher than it was in most of the past 12 months. The Japanese economy has recently benefited from strong external demand, while domestically, the economy looks lacklustre.
Real indicators also mixed
Looking at real indicators, the US housing market has shown some strength recently, with sentiment among homebuilders jumping higher in March and price gains of new and existing homes accelerating. New home sales had been strong in January and February, while existing home sales had struggled to establish an upward trend. Housing should be supported by the robust labour market and deferred demand, but weather trends and the prospect of higher mortgage rates may be supporting demand in the short term. Investment data was somewhat less positive. Orders for durable goods rose robustly in January and February, but volumes have basically moved sideways in the past four years. Orders for capital goods excluding defence and aircraft orders, which are the best proxy for business investment, had reversed a multi-year downtrend in the second half of 2016, but have now stalled for two months. If doubts emerge about fiscal reform and stimulus, business investment may be a prime category to suffer for a correction.
In the eurozone, consumer confidence increased in March, recovering from February’s small dip. Gradually falling unemployment and stable growth should be supportive of consumer sentiment and spending. Higher inflation and lower real incomes are a risk, but we think that more positive developments in business investment should keep the eurozone economy on a firm growth path. But even in the eurozone, not all indicators are positive. Growth in broad money as measured by M3 slipped in February for a second straight month. Bank lending is struggling to grow even at a modest 1% year-on-year (see Exhibit 2 below). Mortgages is the only lending category that has improved of late. Growth in consumer credit has slowed and loans to the non-financial corporate sector are showing barely positive growth.
Exhibit 2: Banking lending in the eurozone remains weak – struggling to achieve even modest growth of 1% year-on-year – graph shows changing in eurozone bank lending for the period between 2005 and 27 March 2017
Source: Bloomberg, BNP Paribas Investment Partners, 27 March 2017
In Japan, the external and domestic sectors are moving in drastically different directions. Export volumes have been robust so far in the first quarter after a strong fourth quarter. With exports growing much faster than imports, the economy can expect another boost from external trade in the first quarter. But consumer spending has been weak lately. Nominal income is hardly growing, while the recent increase in headline inflation is eating into consumer spending power. Moreover, the recent strength in the Japanese yen due to safe-haven flows in a sell-off of risk assets should curtail Japanese exports.
Published on 31 March 2017