Flash PMIs Put a Potential No-Deal Brexit Into Perspective

December is only half over, but the good folks at IHS Markit always get a jump on December data to get ahead of the holidays, which means … drumroll … it is Flash PMI time! PMIs, or purchasing managers’ indexes, are monthly snapshots of business activity that aim to measure the percentage of businesses growing—the “Flash” version being something of a sneak peek. PMIs aren’t perfect, but they are fast (especially Flash versions, as the name implies), and they often contain interesting nuggets. So it is in December, with results in the US, UK and eurozone overall mixed. The UK improved as its composite PMI (services plus manufacturing) inched back over 50, implying expansion. The eurozone contracted at a slower rate, and the US grew a tad more slowly. But the real eye-popping figures came from UK and eurozone manufacturing, which soared to multiyear highs. The reason why, in our view, offers investors some insight into a big Brexit fear.

That reason: Soaring supplier delivery times. These add to PMIs, as a delay in obtaining parts from suppliers implies demand is surging. That is the theory, at any rate, and it is often true. But sometimes delivery times shoot up because of issues at ports. This happened in America when West Coast ports had labor disputes a few years ago, causing container ships to stack up offshore. It is happening again today worldwide—and most notably in Southern California and the UK—as the combination of online holiday shopping and ports’ social distancing requirements is causing huge backlogs of unloaded containers from Asia. This is a big side effect of the pandemic and one that is quite clearly creating winners and losers, even if PMIs treat it as a big positive, which we think underscores the need to look under the hood when assessing even good-looking data.

Note, we aren’t saying this is some huge forward-looking negative. It isn’t even the first time ports stacked up this year. As Markit’s press releases note, supplier delivery times were even higher during the first lockdown. Port operators worked through the backlogs, truckers dispersed the delayed goods, and we all got our toilet paper, videogame consoles, gizmos, loungewear and pantry staples. Factories, too, got what they needed and were able to ramp up output bigtime over the summer. The same is likely this time around.

In normal times, this would just be an interesting observation without much forward-looking use for investors—but these aren’t normal times. Rather, we are two weeks from the very real possibility of the Brexit transition period expiring, requiring customs checks at ports for goods leaving and entering Great Britain. For years, pundits have warned this will cause chaos, with container ships piling up a gajillion times faster than longshoremen can unload them and miles-long queues of truckers stacked up on the highways. This, they warned, would lead to severe shortages of basic goods across Britain and hard times for factories as they ran short on parts. Basically, it sounds like … well, a lot like what is going on now.

To markets, it doesn’t really matter whether ports are clogged because of a surge in online shopping, social distancing requirements or paperwork snafus. What matters is whether said clogs are a big negative surprise that businesses don’t know how to overcome. Should those worst-case scenario predictions come true for Britain’s ports (which ports operators have stated they have their doubts about), not only would it not be a surprise, but society has already shown it can adapt and move on. It did so earlier this year. Markets, which are having a fine month even with containers stacking up like Legos, are signaling the world will survive and thrive again. In our view, there is no reason that can’t be true for Britain once the last Brexit strings are cut.