While trade agreement headlines have markets in a celebratory mood, accumulating U.S. economic data speaks to the undertow of slow global growth. Unpacking the Manufacturing Purchasing Managers Index (PMI) - the leading indicator of manufacturing and service sector activity — released July 1, 2019 speaks to this dynamic.

The PMI comprises five sub-indexes derived from surveys of supply-chain managers across various industries.

Historically the New Orders Sub-Index has been the strongest predictor of what the PMI level will look like going forward and the current trend is uninspiring at best. The graph below plots a rolling 3-month average of both the overall PMI and the New Orders Index, beginning in December 2009.

Longer-term history (going back to 1948) shows the New Orders Index is higher than the overall PMI in 81% of the monthly data - this dynamic is to be expected if an economy is growing, and for much of this history growth has been the mode for the US economy. Since the current expansion began (2009), the New Orders Index has been above the PMI 87% of the time and since November 2012 (80 months) 94% of the time.

June data - the latest - shows the New Orders Index at 50.0, at its lowest level in over three years and dipping below the overall PMI at 51.7. New Orders were below overall PMI during two of the three months in 2Q 2019 — the first rolling three-month period where this has occurred since October 2012.

What does this mean for the rest of 2019?

Estimates have retraced hard recently, just as we approach earnings season; we will know only in hindsight whether slipping economic numbers hedge earnings disappointments, but the reality of these economic data will surely be observed in earnings themselves.

A sub-50 PMI is not difficult to visualize based on the data above, and we would expect it to reignite recession narrative despite optimistic markets and a doggedly accommodative central bank. The Fed rallied the stock market recently by signaling its intention to cut rates in the coming months, and it may be that investors are placing significant faith in the Fed to leverage policy tools to reverse the recent weakness and current trend in manufacturing data.



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