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After what seems like 5,409 months, we’re finally about to close the first half of 2020!

Can major economies start to see steady recovery from the impact of COVID-19?

Let’s see what the world’s largest manufacturers think. We’re checking the manufacturing PMIs, yo!

What the heck is a manufacturing PMI?

A purchasing managers index (PMI) is a survey conducted among a few hundred purchasing managers in the manufacturing sector.

Respondents are asked for opinions on employment, inventory levels, new orders, and production and supplier deliveries for the next 12 months. They note if these factors have risen/improved, fallen/deteriorated, or remain unchanged.

An index reading of 50.0 and above hints at optimism among the manufacturers, which could lead to industry expansion.

Consequently, a reading of 49.9 and below denotes pessimism and possible industry contraction.

Traders watch PMIs because they act as leading indicators for the manufacturing sector and because many central banks consider PMI readings in their monetary policy decisions.

So, how are the manufacturing industries of major economies doing so far this year? Let’s break down the PMI charts per region:

North American economies

  • Markit’s U.S. PMI noted that slower declines in output, new orders, and job losses made manufacturers less pessimistic in June. The index shot up from 39.8 to a four-month high of 49.6.
  • ISM’s U.S. PMI called May a “transition month” as respondents began returning to work. Demand remained uncertain, though, which is why the index only improved from 41.5 to 43.1.
  • Though it jumped from 33.0 to 40.6, Canada’s May PMI still marked the second-lowest since the survey began in 2010. Markit shared that the sector “remains on a steep downward trajectory” as drops in domestic and export markets resulted in “sharp” cuts to production volumes.

European economies

  • Euro Zone’s PMI hit a four-month high (46.9) in June as output and demand graduated from “collapsing” to “falling.” Respondents “remain cautious of the strength and sustainability of the rebound,” however, as pandemic restrictions continue to hit businesses.
  • Germany’s PMI celebrated slower declines in new orders, output, and employment as well as the stabilization of supplier delivery times after the previous months’ supply chain disruption. The index climbed to a three-month high of 44.6 which Markit said represented “sustained recovery.”
  • France’s PMI suggested that the economy is “past the peak of the coronavirus cases” and that it’s “entering a period of recovery.” The index reached expansionary territory at 52.1 which is also a 21-month high for the report.
  • The partial reopening of manufacturing plants helped boost the U.K.’s Markit PMI to an expansionary reading of 50.8 after three consecutive months of decline.
  • Switzerland’s PMI dipped from 43.7 to 42.1 in May even after the government eased lockdown restrictions. Procure noted the stabilizing production and labor market though “supply bottlenecks remain widespread.

Asian and Australian economies

  • China’s (official) PMI clocked in a slightly less optimistic (but still expansionary) reading of 50.6 in May. A closer look showed domestic demand leading the improvement with export orders still contracting.
  • Caixin’s PMI also showed increased manufacturing activity in May though it noted that “production recovered faster than demand.
  • Australia’s PMI jumped from 44.0 to 49.8 in June as the industry saw softer reductions in output, new orders, and exports. This led an analyst to believe that Australia is “past the low point in economic activity.
  • New Zealand ending its extreme lockdown measures helped boost its PMI from 25.9 to 39.7 in May. BusinessNZ noted that further easing of restrictions would help manufacturing numbers in June.
  • Unlike in most PMI trends, Japan’s manufacturing sector saw employment falling at a faster rate and production falling by its fastest rate since March 2009 for the month of June. Yikes!

It looks like manufacturers are now feeling optimistic after months of supply and production restrictions.

An important thing to note when reading PMI reports is that respondents are comparing their sentiments with the previous month.

A jump from 42.3 to 51.0 just means that manufacturers are 8.7 points more optimistic than last month, not that manufacturing activity is as strong as the last time the PMI reached 51.0.

Given that a lot of manufacturers started from ZERO or very limited activity during the lockdown, even the smallest easing of restrictions will see a spike in optimism.

So, rather than focus on post-lockdown optimism, we should look at trends in export demand, production, and supply movement for clues on the path of global economic recovery.