Global Manufacturing Improvement

Michael Rudd, CFA | President, CEO & Portfolio Manager

We closely watch Purchasing Managers Indices (PMI) as part of our investment process. PMIs are produced by IHS Markit, which is a unit of S&P Global Inc (SPGI US), a company that we recently added to the Pathfinder North American Equity Portfolio. Every month, a group of managers, sampled by industry and size to represent 45 economies around the world, are asked about their business expectations (staffing, sales, inventory etc.) for the coming month. The surveys focus on managers’ expectations for their business: i.e. will my business components expand, remain the same or contact. It is a diffusion index, which means that the results are set on a baseline of 50. A number above 50 indicates expansion, while results below indicate contraction. The companies can then be grouped together by industry, country, size or geographic area. PMIs have been around for a while, but the IHS Markit survey brings consistency of measurement across countries and industry. They also ensure the same companies participating over time.

Earlier this week we noticed an improvement in manufacturing expectations around the world. We view this as very positive. While the consumer is a critical part of the global economy, especially in the US, a strong manufacturing outlook is very positive. It provides an indication of demand from consumers and the potential for an expanding economy. If, as a group, manufacturing companies around the world have become more confident in their business, then we want to pay attention to that.

Figure 1 presents the data for the last two months for the largest economies around the world and Canada. As you can see, other than Europe and Canada, the major economies are in expansion territory, and the rate of expansion has improved. Europe is still solidly in contraction but showed the most improvement of the group. Canada is the only economy that deteriorated over the month (note the BOC rate decrease this week).

“This means that” we continue to have a forward positive view on the global economy and remain hopeful that a soft landing has been achieved. There are still several risks that could derail his process (sticky inflation, geopolitical risk, the Chinese economy) but at this point we maintain our constructive view.

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