Global PMIs Counter Trade Gloom

September is off and running, which means one thing: We now have the full range of purchasing managers’ indexes (PMIs) for August! Overall and on average, these business surveys show broad-based growth globally—great! Even better: They also reflect widespread trade concerns. We believe this illustrates a wide gap between uneasy sentiment and a fine reality—ideal bullish conditions.

For those unaware, PMIs ask representative firms how their business fared. Did production expand or contract? What about new orders, employment, inventories and backlogs? Surveyors then compile these responses into an overall business activity index. By convention, readings above 50 denote expansion and below 50 contraction. Because PMIs measure only growth’s breadth—how many firms expanded (or contracted)—they don’t say anything about its magnitude (by how much). But while PMIs don’t move in lockstep with GDP, they provide a timely look at economic activity.

In America, the Institute for Supply Management (ISM) August manufacturing PMI rose 3.2 points to 61.3—a 14-year high—while forward-looking new orders surged 4.8 points to 63.3.^[i] ISM’s non-manufacturing PMI—including services, the bulk of US output—rose 2.8 points to 58.5, with new orders up 3.4 points to 60.4, signaling further growth.^[ii] Yet when questioned, respondents overwhelmingly said they dread tariffs. While understandable, considering manufacturers would get hit hard in a trade war, their wide-ranging advance demonstrates tariffs enacted thus far aren’t a huge headwind. This isn’t surprising, considering the tariffs’ small scope. Those enacted and threatened are a tiny fraction of global GDP, and they are relatively easy to work around, undercutting the popular view that they could soon derail the expansion. Rejiggering supply chains and rerouting trade may not be fun, but for many firms in America’s vast private sector, tariffs aren’t holding back expansion.

The UK’s PMIs also show growth chugging along. As in the US, respondents fret trade, but mostly because of Brexit uncertainty. Yet there is scant evidence of an impact on anything beyond sentiment. The IHS Markit/CIPS Manufacturing PMI fell a point to 52.8 in August—its lowest since the Brexit vote, but still expansionary.^[iii] New export orders dipped into contraction territory, falling from 53.0 to 47.4, but total new orders expanded.^[iv] Meanwhile, the Services PMI—representing 80% of UK GDP—rose 0.8 to 54.3, with new orders improving.^[v]

Many blamed manufacturing “weakness” on the potential for a no-deal Brexit—the UK leaving the EU without a trade agreement—and ensuing chaos. But we see a few problems with this. First, headline PMIs remain above 50—the UK economy continues growing despite uncertainty. Second, even if PMIs or some components dip below 50, that isn’t necessarily disastrous. In the month after the Brexit vote, PMIs fell below 50, only to pop back the next month. The UK economy was still sound—folks realized the vote just started a negotiation process; it didn’t alter current trade relations. New export orders also fell below 50 in October 2014 without ill effect. Moreover, trade has been choppy throughout the UK’s expansion—wobbles don’t automatically mean a trend change. Third, even if the UK and EU don’t reach a trade agreement, trade likely wouldn’t cease. It would just revert to WTO rules. This could add some friction, but it hardly seems like a calamity. Brexit uncertainty may cloud the future, but it hasn’t stopped growth—the UK is carrying on.

Across the Channel, eurozone PMIs indicate broad-based growth. The IHS Markit Eurozone Manufacturing PMI fell half a point to 54.6 in August—still solidly expanding—while new orders continued growing, albeit at a slower rate.^[vi] August’s Services PMI edged up to 54.5 from July’s 54.2.^[vii] New orders also inched higher. Yet most news coverage focused on modestly fading expectations. According to IHS Markit economist Chris Williamson, “Worries about trade wars and the damaging impact of tariffs, as well as Brexit and other political worries, all contributed to a dampening of business optimism about the year ahead. Business expectations were the second-lowest since November 2015.” This may seem ominous, but PMIs’ business confidence surveys aren’t too telling. They reflect respondents’ feelings, but don’t reveal much about actual business. That said, business expectations above 60 are pretty high—firms are far from gloomy!^[viii] A solid majority of firms remain upbeat about the future. This shows how the press can be pessimistic even when businesses aren’t.

While many look askance at perfectly good growth—believing it unlikely to last amid a tariff onslaught—this exaggerates the likely impact, in our view. Properly scaled, tariffs are a blip on the radar. Since stocks move most on the gap between sentiment and reality, we think the gap these global PMIs illustrate is bullish—leaving plenty of room for global stocks to climb the wall of worry.