Economic Slowdown Signaled By Disastrous Flash May PMI Reading

Economic Slowdown - Jobless Claims Stay Low

Before getting into the seemingly imminent Economic Slowdown, let's discuss the jobless claims. In the week of May 18th, jobless claims fell 1,000 to 211,000. 

As you can see from the chart below, the past couple jobless claims reports have settled in between the spike in late April and the trough in early April. That’s good news because the spike only meant there was a chance the labor market was weakening. 

Investors needed to see a few more weeks of bad data before coming close to calling for a recession. Even if claims don’t ever make a new cycle low, it’s not an issue. They are still very low.

4 week average fell back down to 220,250 from 225,000. It was mistaken to suggest that heightened jobless claims were supportive of the burst in layoff announcements earlier in the year. We still don’t know if the spike in claims a few weeks ago was related to Easter. But it doesn’t matter now as they have fallen. 

Continuing claims increased 12,000 which pushed the 4 week average up 5,500 to 1.674 million. This data lags by one week, so I wouldn’t be surprised if continuing claims fall in next week’s update.

Weak Kansas City Fed Reading

Economic Slowdown - Strong May Empire Fed and Philly Fed readings increased expectations for the rest of the regional Fed reports. Therefore, many were disappointed by the Kansas City Fed reading. 

As you can see from the chart below, the index fell from 5 to 4 which missed the consensus for 6. This report isn’t a disaster, but quells my optimism for the May ISM PMI. Basically, this lowers the odds the PMI increases significantly. That could change after the rest of the regional Fed readings come out. This could be a one-off report.

Production index fell from 12 to 2 and the volume of new orders index fell from 10 to 4. Volume of shipments index fell from 9 to -2. 6 month expectations index looks a little better as the composite increased from 11 to 12. Production index increased from 14 to 20. Volume of shipments index increased from 14 to 23. Capex index increased from 23 to 27. 

Generally, the current index matters more because the future index has little predictive value. 

Economic Slowdown - Therefore, I’d say this was a slightly bad report with some green shoots.

We have the luxury of reviewing comments in this report which will tell us why the results were subpar. One firm stated, “April was a down month but May will be worse. Tariffs will force us to reduce our workforce and increase costs to the consumer.” 

This negative viewpoint on tariffs can either be a positive or a negative depending on how you think trade negotiations will go in the next few weeks. If you think a trade deal will get done this summer, then you should be happy to see that the main aspect hurting manufacturing firms’ sentiment is trade.

Regional PMI and every other soft data manufacturing report will spike after a trade deal is made. Technically, the April industrial production report was weak because of a calendar issue. That implies May might rebound all else being equal. 

One good thing for manufacturing firms is that the round of tariffs that will start effecting goods shipped from China late this month is mostly consumer goods. That’s more of a small negative rather than a net positive, but you get the point.

Flash PMI Disaster

Economic Slowdown - The May Markit Flash PMI was a complete disaster. Whenever very bad economic reports come out, I take a cautious approach rather than having a knee jerk reaction. Hard data reports can be revised to show something different a month later and sentiment sometimes swings wildly. 

With that being said, let’s get into the details of this report. Composite index fell from 53 to 50.9 which is a 3 year low.

As the chart below shows, the flash services PMI fell from 53 to 50.9 which is a 39 month low. Finally, the manufacturing PMI fell from 52.6 to 50.6 which is a 116 month low. That’s the lowest reading since September 2009. It’s one of the first readings to show this slowdown is worse than the one in 2015-2016. 

This report makes the Kansas City Fed reading look good and differs dramatically from the Empire Fed and Philly Fed readings. 

The overall report is so bad it makes the Chicago Fed index look solid. 

Economic Slowdown - However, it’s a flash reading which means it only includes data from the first two weeks of May. I’ve seen the PMI turn around after a bad flash reading.

Markit PMI technically tells us what we already knew about Q2 GDP growth, namely it will be below 2%. It’s just hard to swallow the sharp change in this reading from April. Specifically, the commentary section stated this PMI is consistent with 1.2% GDP growth which is the exact estimate the Atlanta Fed Nowcast has. Business confidence fell to its lowest level since 2012.

In the services category, the level of outstanding business fell for the first time this year and employment growth fell to a 25 month low. In the manufacturing category, new orders declined for the first time since August 2009. The fall in new orders was a major reversal from the growth seen in the April reading. 

Relative to the April regional Fed reports and the industrial production reading, the Markit reading was solid. If industrial production is worse than what this flash PMI indicates, it will be consistent with a recession.

Economic Slowdown - Conclusion

Jobless claims were solid again. May labor report should show at least 100,000 jobs were created. Kansas City Fed manufacturing index was mildly weak. Markit PMI was a disaster. 

Yes, it is consistent with the Atlanta Fed’s GDP Nowcast. But that’s a low estimate versus the census and this PMI is down sharply from April. It was a big shock for me and many other investors. It’s consistent with the theme that economic reports have been weak. However, I need to see further support before I start thinking this is the worst slowdown of this expansion.

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1 Comment

  • Frantz Landberg

    May 27, 2019

    Hi John,

    thanks for a nice always !

    🙂 Kind regards