Smokin’ hot economic data, in our view, shows the global economy is just getting warmed up. Source: Uriel Sinai/Stringer/Getty Images.
Lately, it seems nearly any economic data point is seen through the lens of “what it means for Fed policy.” This overstated hyper-focus leads some to believe positive data only exist because of central banks’ support, and gains will reverse as soon as QE’s punchbowl is removed. To us, such worries speak more to dour sentiment than economic reality. We’ve noted a (huge) number of fundamental reasons why the current global bull market should keep running—none of which include QE. And a batch of smokin’ hot manufacturing PMI data released Thursday adds to the growing evidence the world is poised for further growth.
On balance, factory activity is accelerating globally. China, whose slowing growth has recently wracked many a nerve, saw both of its manufacturing PMIs accelerate. The official one, which covers big state-run firms, rose 2 points to 50.3 for July, while the HSBC survey, which covers small private firms, rose 2.4 points to 50.1 (50 is the dividing line between contraction and growth). Similarly, the eurozone’s composite flash PMI expanded in August, with the services sector in its first expansion in 19 months and manufacturing growing faster. The US’s flash manufacturing PMI also sped up in August, to 53.9. And in the UK, a survey from the Confederation of British Industry (CBI) showed factory output at a two-year high.
So factories are humming around the world—and looking forward, they likely keep chugging. How do we know? Inventories are shrinking! US business and wholesale inventories have fallen recently, with wholesale stockpiles down three straight months. The UK’s new orders to finished goods ratio is historically high, and British inventories fell the fastest in three years in July. Germany’s inventories also significantly fell in July—and have fallen for seven straight quarters. Firms globally can’t keep up with rising demand. So they’ll have to restock—which should provide a big manufacturing boost and overall economic tailwind.
Looking at the subcomponents of the fresh PMI data, this seems to be starting already—each survey’s new orders sub-index was particularly strong! US new orders jumped to 56.4—a seven-month high. Gangbusters new orders in Germany boosted the eurozone aggregate to 53. Both Chinese surveys saw new orders pick up. And the CBI survey suggested UK new orders are the strongest in two years. This is likely just the start—with demand high and backlogs still piling up, we should see plenty more factory activity ahead.
None of this would happen if the global economy were weak. Nor would Leading Economic Indexes (LEI) globally be high and rising—with the US LEI up big in July (on new orders, we might add). But investors still underestimate the economy’s strength—and, funnily enough, it’s partly because inventories are down. Falling inventories are a drag on GDP—rational when they’re down because firms are getting lean in anticipation of tough times, but misleading when firms simply can’t keep up with sales. And sales are up globally, suggesting this is the case today. So people see the world as a bit weaker than it is—just one more indication sentiment remains mixed, with skepticism aplenty. Which, in our view, means this bull still has room to run. There is still a big gap between dour expectations and a positive reality, which stocks love. As sentiment improves and investors start realizing reality is better than they thought, they should gain more confidence in companies’ future earning potential—and bid stocks ever-higher.
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