April Markit PMI Weak - But Decent Q1 GDP Growth

April Markit PMI - 2.2% GDP Growth

Q1 initial GDP reading will be released on Friday. To be clear, this reading might be far from where it ends up after revisions. However, there isn’t an obvious bubble, like tech and housing in the past 2 cycles. Also, there are very few indicators signaling a recession is afoot. Therefore, I don’t think this GDP report will swing wildly to the downside once it is updated. 

Initial GDP report matters in the sense that it is an estimate of growth based on the reported data. It’s like a more accurate version of the GDP Nowcasts. It’s far from fact, but if we wait until the final results come out, we will miss the movement in markets. The biggest problem with GDP is when prognosticators act as if this estimate of the economy is all that matters. It’s a loose summary of economic activity.

As you can see from the chart below, estimates have crept up to 2.2% which implies quarterly growth will be the same as Q4. 

April Markit PMI - We’ve seen a few terrible first quarter GDP readings in this expansion. 

Even after the seasonal adjustment was updated, we’ve still seen some weakness. With the government shutdown hurting growth in the beginning of the quarter and the negative economic momentum leading into the quarter, GDP growth below 1.5% wouldn’t have been a shock.

Normally, this Q1 GDP report would be a nothingburger because growth is near this cycle’s trend. However, it is a big deal because stocks cratered late last year because of recession scares and they rallied abruptly this year because investors are realizing that scare was a mistake. Improving trade negotiations with China along with the Fed turning dovish affected stocks. But we can’t ignore the point that the fears were wrong.

Not every market reaction is correct. If you think every movement is correct, you shouldn’t be trying to outperform the market on a risk adjusted basis. Just buy the index and forget it if you believe in the efficient market hypothesis. Manufacturing, which is one of the weakest parts of the economy, isn’t as weak as last slowdown. Meaning, so far this slowdown hasn’t been that bad.

April Markit PMI - Weak Markit Reading

I’m always interested in covering all sides of the economic story. That’s why this portion of this article will have a more negative tone than the first section. Economic reports are rarely in agreement. However, because you know I’m willing to look at the negative reports as well, you can trust when I say very few are giving recessionary readings/warnings.

Flash April Markit report wasn’t great mostly because of the decline in the services PMI. Composite PMI fell from 54.6 to 52.8 which missed the consensus of 54.3. Manufacturing PMI was stagnant at 52.4 which beat the consensus for 52.2. 

While that was below the services PMI, manufacturing and services slowing at almost the same rate is a new phenomenon. Finally, the services PMI took a big swoon from 55.3 to 52.9 which missed the consensus by a huge margin as it was 55. Composite index fell to a 31 month low. Services PMI fell to a 25 month low. Manufacturing output index actually increased to a 2 month high as it increased from 51.3 to 52.4.

It’s much worse for services to be in a downturn than manufacturing, but before we predict a recession, we must recognize this is only a flash reading of one month’s report. Let’s wait for the full April report before we get too concerned. That being said we must delve into the details of this report.

Output growth weakness was catalyzed by weakness in new business growth; exports only rose slightly. New order growth was the weakest in 2 years. Backlogs increased at the slowest rate this year. 

April Markit PMI - This month had the weakest payroll growth since April 2017. 

It will be interesting to see how that correlates with the April BLS report since jobless claims are so low. Input price inflation was the weakest since September 2016. That supports the Fed’s rate hike pause. Finally, business optimism fell to the lowest level since June 2016.

In the service sector, firms negatively revised their output expectations and signaled they expect employment growth to slow. Input and output cost growth fell. Competition for new work and declining growth in input costs lowered selling price inflation. 

In the manufacturing sector, new order growth and output growth improved, but employment and pre-production inventory growth fell.  New business growth was the strongest in 3 years, but growth was much below last year’s rate. Finally, inflation pressures weakened.

On an overall basis, the April Markit report is consistent with annualized GDP growth of just under 2%. That’s in line with the NY Fed Nowcast which expects 1.92% growth in Q2. It’s interesting to see that even though the services PMI was terrible relative to its recent history, the composite index still predicts growth in line with the long term trend. 

The overall reading also implies April BLS job growth of 130,000 which is much below the Q1 average of 198,000. The estimates for the April report aren’t out yet. I think job creation will be slightly higher than what Markit indicates. Jobless claims reports have been strong. I also think services is doing better than what this PMI shows. The next few weeks of data will tell us if I’m correct.

April Markit PMI - Conclusion

To be clear, Q1 GDP growth can be 2.2% and April can be weak for services since April is in Q2. However, the Markit report is still weaker than what most expect given the other recent economic reports. 

Key takeaways from this article are that the recession scare last year was overblown and that the service sector might be joining manufacturing in this moderate slowdown. 

So far, this hasn’t been a sharp slowdown, but there isn’t a clear sign of it ending soon. 

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