One of my favorite songs is “We Didn’t Start the Fire” (1989), by Billy Joel, who is one year older than I am. The lyrics are simply a long list of major personalities and issues that have pleased, pained, and plagued my generation—the Baby Boomers—since our parents started to have children during the late 1940s. The lyrics include brief, rapid-fire allusions to more than 100 domestic and global headlines during the Cold War, from 1949 through 1989. Many of them refer to troublesome events during that period. Today, Billy Joel would have no trouble updating his list of troublesome events: Red China, North Korea, South Korea, vaccine, Ayatollah’s in Iran, foreign debts, homeless vets, China’s under martial law, impeachment, MMT, negative rates, deflation, inverted yield curve, M-PMI, and
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Today, Billy Joel would have no trouble updating his list of troublesome events: Red China, North Korea, South Korea, vaccine, Ayatollah’s in Iran, foreign debts, homeless vets, China’s under martial law, impeachment, MMT, negative rates, deflation, inverted yield curve, M-PMI, and many more. Actually, the first eight items were in Joel’s original lyrics.
Yesterday’s cause for concern was the release of September’s M-PMI report. It wasn’t pretty. It was weak across the board (Fig. 1). Consider the following:
(1) Weak, but still no recession. The overall index fell to 47.8 from 49.1 during August. These are the first readings below 50.0 since 2016. There was no recession back then. The latest readings don’t signal a recession now according to the Institute for Supply Management (ISM), which conducts the PMI survey:
“A PMI® above 42.9 percent, over a period of time, generally indicates an expansion of the overall economy. Therefore, the September PMI® indicates growth for the 125th consecutive month in the overall economy, and the second month of contraction following 35 straight months of growth in the manufacturing sector. The past relationship between the PMI® and the overall economy indicates that the PMI® for September (47.8 percent) corresponds to a 1.5-percent increase in real gross domestic product (GDP) on an annualized basis.”
(2) Regional surveys also mostly down and out. The three major components of the M-PMI were all below 50.0 during September: new orders (47.3), production (47.3), and employment (46.3), as Debbie reviews below. The weakness in the M-PMI was confirmed by the composite and orders averages for the regional business surveys conducted by five Federal Reserve district banks (Fig. 2). However, the regional average employment index rebounded during September, while the employment component of the M-PMI fell to the lowest reading since January 2016 (Fig. 3).
(3) Trade war hits exports index. Also standing out on the weak side was the M-PMI’s new exports component, which plunged from last year’s peak of 62.8 during February to 41.0 during September (Fig. 4). That was the lowest reading since March 2009. Trump’s escalating trade war has depressed US exports, according to the latest ISM survey. The imports index, however, edged up from 46.0 during August to 48.1 last month.
(4) Bad news for S&P 500 revenues. The growth rate in S&P 500 aggregate revenues, on a y/y basis, is highly correlated with the M-PMI (Fig. 5). September’s reading for the latter suggests that the former could turn negative. That would imply negative earnings growth too. Aggregate revenues were up 3.0% during Q2.
The good news is that aggregate revenues growth is also highly correlated with the NM-PMI, which remained above 50.0 in September for the 122nd month, though is showing a slowdown in service-sector growth. September’s reading fell to a three-year low of 52.6 from 56.4 in August and a recent peak of 60.8 a year ago. However, ISM notes that an NM-PMI above 48.6, over time, generally indicates an expansion in the overall economy (Fig. 6).