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Capex weakness to drive PMI double dip

May 10, 2023 by Simon Ward

The global manufacturing PMI new orders index – a timely indicator of global goods demand – was little changed below 50 (49.4) in April, a weaker result than had been suggested by DM flash results. 

Inventories indices for finished goods and production inputs, meanwhile, rose further to their highest levels since November. Accordingly, new orders / inventories differentials – which often lead at turning points – fell for a second month. 

These results are consistent with the forecast here that a recovery in PMI new orders since December 2022 would fizzle out in H1 and reverse into H2, with a possibility of a break below the December low. The basis for the forecast was a relapse in global (i.e. G7 plus E7) six-month real narrow money momentum around end-2022. Real money momentum moved sideways in March at around its June 2022 low – see chart 1.

Chart 1

Chart 1 showing Global Manufacturing PMI New Orders & G7 + E7 Real Narrow Money (% 6m)

A downswing in the stockbuilding cycle was a key driver of earlier PMI weakness. A further drag is in prospect but the down phase of the cycle is well advanced, with incoming data and average cycle length suggesting a low during H2. 

Business capex is emerging as a new source of global goods demand weakness. The capital goods component of PMI new orders reached a new low in April – chart 2. 

Chart 2

Chart 2 showing Global Manufacturing PMI New Orders

A contraction in business investment is consistent with a squeeze on real profits in late 2022 – chart 3 – and weak corporate money trends: business broad money holdings have fallen in nominal terms recently in the US, Eurozone and UK – chart 4. 

Chart 3

Chart 3 showing G7 Business Investment (% yoy) & Real Gross Domestic Operating Profits (% yoy)

Chart 4

Chart 4 showing Broad Money Holdings of Business / Corporations (% 6m)

Other evidence of a capex downturn includes: 

  • Weak capex intentions in regional Fed manufacturing surveys (and the NFIB small firm survey) – chart 5.  
  • Weak enterprise loan demand for fixed investment in the ECB bank lending survey – chart 6.  
  • Falling capital goods / machinery orders in the US, Japan and Germany – chart 7.

Chart 5

Chart 5 showing US Non-Residential Fixed Investment (% yoy) & Regional Fed Expected Capex Average* *Average of Dallas, Kansas, New York, Philadelphia & Richmond

Chart 6

Chart 6 showing Eurozone Non-Residential Fixed Investment (% yoy) & ECB Bank Lending Survey, Loan Demand from Enterprises for Fixed Investment

Chart 7

Chart 7 showing Capital Goods Orders January 2015 = 100

Capex retrenchment is usually accompanied by a fall in labour demand. Adjusted for negative revisions to the prior two months, the addition to US non-farm payrolls in April was 104,000, the smallest since January 2021 – chart 8. Revisions in the last three reports cumulate to -200,000, a level rarely reached outside recessions – chart 9.

Chart 8

Chart 8 showing US Non-Farm Payrolls Change (000s) First Estimate Actual & Adjusted for Revisions to Prior 2 Months

Chart 9

Chart 9 showing US Non-Farm Payrolls Change Revisions to Prior 2 Months (000s)
NS Partners Ltd.
May 10th, 2023