Latest PMI numbers show sharp contractions in manufacturing, services

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Macroeconomics

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Purchasing Managers Index, or PMI, numbers are at best an estimate of sentiment and an indication of business confidence about the coming months.

But confidence can evaporate like dew in the sunshine.

In today’s uncertain world, however, we tend to cling to any data points for a clue on how the economy is faring and what the future may hold.

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So when The Economist reported last week on the latest PMIs produced by IHS Markit, we felt it worth reviewing what the data may suggest is to come.

In short, the numbers suggest a sharp contraction. As businesses were either forced to close or their sales plunged almost overnight, it is hardly surprising PMI numbers followed.

In the Eurozone, the overall, or composite, index plunged to 31.4 from 51.6 in February, The Economist reported — the lowest reading since the index was created in 1998.

The services index slumped from 52.6 to 28.4, beating the previous dire record of 39.2, set in February 2009, by a distance. Service-sector jobs were cut at the fastest rate since May 2009 as leisure and tourism were hit hard and fast. Manufacturing, which was already shrinking in the Eurozone, turned profoundly bearish, sliding from 48.7 to 39.5.

In America, the drop was less severe than in Europe: from 49.6 to 40.5 overall.

Manufacturing slipped from 50.7 to 49.2, implying only a slight contraction. Nonetheless, that is still the sharpest drop since August 2009, the report stated.

CNBC reported this week a record 3.3 million Americans filed initial jobless claims for the week ended March 21. Economists surveyed by Dow Jones expect another 2.65 million to join them this week, the site added.

St. Louis Fed President James Bullard is reported by CNBC as saying the economic risk from the coronavirus could cost 47 million jobs and send the unemployment rate past 32%. The Fed estimates there are nearly 67 million Americans working in jobs that are at a high risk of layoffs. That might be an extreme estimate, but it is illustrative of what dire predictions are coming out from some quarters and no doubt contributing to managers’ dim view of the economy this year.

Back to The Economist report, Chris Williamson, chief economist at IHS Markit, is quoted as saying the March numbers are roughly consistent with a fall in American GDP of 5%, at an annualized rate, and around 2% quarter-on-quarter (i.e., faster still) in the Euro area. These estimates were based largely on February/early March data with March as a whole likely to be steeper and suggesting further falls are ahead in Q2.

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On a brighter final note of how this could all end, there was a surprise pickup in Chinese manufacturing PMI this morning, with a growth number of 52 recorded (against a forecast of 45), pointing to further underlying growth potentially picking up quite promptly as the epidemic retreats there.

Where China has led in this pandemic, the rest have followed – both good and bad. A quicker return to growth may be possible, however dire the situation appears now.

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