Fynsa
July business surveys reveal a clearer global slowdown. The global all-industry PMI slipped broadly (including China), more than reversing June's gain and falling back to its lowest level of the expansion. At 50.8, J.P. Morgan's manufacturing PMI, the best single indicator of global activity, fell 2.7 points from June to a level consistent with annualized global GDP growth of 2.2%. While the implied pace of global GDP growth from the PMIs (2.2%) is slightly below potential (2.6%), the surveys do not yet signal the kind of sharp downturn that would be expected if the global economy had entered a recession, as many fear.
However, this does not mean that there are no reasons for concern, as the surveys highlight a number of weak areas. Along with a further decline in orders and expectations of future growth to expansion lows, there are worrying signs that labor markets may be turning more than expected. Combined with a broad-based decline across all sectors and countries, the July surveys underscore heightened recession risks mid-year.
By sector, both manufacturing and services appear to have slowed. The global manufacturing PMI fell 2.4 points last month to a level consistent with stagnant growth in the industrial sector. At the same time, the decline in the manufacturing PMI for new orders and the increase in the inventory PMI suggest that global industry has already contracted.
Meanwhile, the services PMI fell sharply last month by 2.8 points. While the decline is partly due to a surprisingly large collapse of 5.4 points in the US services PMI (which contrasts sharply with the increase reported in the non-manufacturing ISM, which unlike the PMI also includes government, construction, and mining), considerable declines were reported in all reporting countries except China and Russia.
A welcome development in recent surveys is the signs of moderation in inflationary pressures. Price indices remain high, but the declines are encouraging. However, even these signs come with a note of caution: the decline in the PMI for input and output prices across the industry could be as much (or more) a sign of weakening demand as it is of improving supply.
Finally, the sharp slowdown in global growth is a reminder that the market may be overly optimistic about expected earnings growth for 2022 and 2023. Global growth closer to 2% should be consistent with zero earnings growth for the S&P 500, while the market continues to expect growth closer to 10%.
