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Today’s major economic releases were the IHS Markit Purchase Manager Indexes (PMI) in the US and Europe. They showed a strong rebound in June, reflecting the economic reopening in the respective regions. However, they remained below the 50 mark, which is the threshold for growth, implying that the pace of contraction slowed, but purchasing managers are not signaling growth. Nevertheless, global equity markets rallied on the news of a greater-than-anticipated improvement in the indices.
The U.S. Composite Output Index rose to 46.8 last month from 37.0 in May. Manufacturing PMI jumped almost 10 points from 39.8 to 49.6, while the services PMI rose to 46.7 in June from 37.5 in the prior month. One of the unique dimensions of the current recession is that services are getting hit harder during this downturn than manufacturing, and it looks like US manufacturing might return to growth before services according to the PMI surveys. I also suspect that the PMIs are understating the turning of the economic tide. Many US indicators, including retail sales and employment data, have actually suggested that economic growth resumed in May. I often view PMIs as a survey of business sentiment than a key predictor of the exact level of activity.
On the US price front, IHS Markit noted that “firms stated that higher input costs from suppliers due to COVID-19 related supply chain issues were partially passed on to clients, with some mentioning that demand conditions were such that discounting was no longer required.” It will be interesting to see if future US inflation data confirms this. The last CPI release suggested that prices of essential products and consume-at-home products were generally rising, but prices for other products were falling. Nevertheless, if the US PMI is right on prices, it would mean that deflation risks are lessening.
Flash PMI estimates for the Eurozone positively surprised analysts with a composite reading coming in at 47.5 from 31.9 in the previous month. Market analysts were expecting 40.9, but a considerable number of firms in Germany reported pent-up demand, and corporate sales in France increased as strict lockdown measures were eased. June PMI numbers for Italy and Spain will be coming out soon, but the composite statistic suggests that they are not falling behind. The UK composite output index also jumped to a four-month high of 47.6 in June from 30.0 in May.
For both the US and Europe, I should flag that just because earlier forecasts were overly pessimistic, it does not mean the outlook is bright. Indeed, we should remain cautious of what the early rebound means for the broader economic recovery given the increased state of fragility in the path to recovery, particularly with global infection rates rising. Another key question we need to keep in mind is how economies are going to react when the government’s income support programs are scaled back in the coming months. It seems likely that there will be an initial rebound in growth followed by a sharp moderation to a slow pace of recovery as the hangover from higher unemployment is felt and as consumption remain weak when the virus is still in circulation.