Thursday, February 2, 2012

Global PMIs

Last year, I argued that much of the weakness in US and global economic activity was a temporary consequence of the parts shortages attributable to production disruptions following Japan’s earthquake and tsunami. Also weighing growth down was the Fed’s QE2--starting November 2010 and ending June 2011--which perversely stimulated higher food and fuel prices and depressed consumers’ purchasing power and spending. Those drags dissipated during the summer, but all the commotion over American and European debt issues prolonged the soft patch. Now, though, the US economy shows more signs of recovering from last year’s setbacks.
In the US, January’s Purchasing Managers Index for manufacturing (M-PMI) rose from 53.1 during December to 54.1 during January. That’s the best reading since June 2011. Between then and now, manufacturing participated in the economic soft patch. Actually, the M-PMI has been improving for the past three months. The major components of the M-PMI were mostly solidly above 50: new orders (57.6, up from 54.8!), production (55.7, down from 58.9), employment (54.3, down from 54.8), order backlogs (52.5, up from 48.0), and exports (55.0, up from 53.0).

Just as manufacturing is giving a lift to the US economy, it is doing the same to the global economy. How can this be happening given all the dire predictions for Europe? The answer in a word is “Globalization.” The end of the Cold War marked the beginning of Globalization, which is the integration of national economies through rapidly proliferating and rising free trade.

That process was briefly (and painfully) interrupted in late 2008 and early 2009 as the US financial crisis morphed into a global credit crunch that shut off the availability of trade credits. I suppose it could happen again if the European financial crisis morphs into another global credit crunch. That’s not happening so far. The flood of liquidity provided by the world’s major central banks is keeping global capital markets wide open for business, helping to offset the impairment of lending by banks, especially in Europe. (More for subscribers.)

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