US and China PMIs Diverge: What’s Really Happening?

The ISM (Institute for Supply Management) reported the US manufacturing PMI (purchasing managers’ index) figure today. The index increased to 48.3 in October 2019, below analysts’ expectation of 48.9. In September 2019, the index was at 47.8, a decade-low figure. A reading of below 50 indicates a contraction in manufacturing activity, while above 50 indicates expansion.

PMI and the equity market

Gradual improvement in PMI figures is used as a leading indicator of economic development. However, investors must note that “the PMI seems to be a good, although not perfect, indicator of a country’s current economic condition.”

A contraction in PMI activity could be a concern for the economy and job market growth. In the present scenario, the US PMI figures aren’t very impressive. However, the S&P 500 Index made an all-time high of 3,063.96 in today’s trading. Though it’s not necessary that the equity market take cues from the PMI figure, the figure is still significant in gauging overall economic growth.

GDP at 1.1%

In the wake of the release of the ISM US manufacturing data, the Atlanta Fed estimates fourth-quarter GDP growth to be just 1.1%. In the fourth quarter of 2018, this growth rate was at 2.9%. The third quarter of 2019 saw US GDP grow 1.9% compared to the 1.6% estimate. For the third consecutive month, US PMI came in below the 50 mark.

A lower PMI figure is important for industrial stocks such as Boeing (BA) and General Electric (GE). Any further decline in the US economic growth rate could affect consumer spending. On a year-to-date basis, BA and GE stock prices have risen 18% and 22.9%, respectively.

US and China PMI diverging

The backlog of orders index and the production index also contracted in October 2019 compared to September. However, the new orders index and the employment index improved marginally in October compared to September. But both the new order index and employment index were still in the contraction zone at 49.1 and 47.7, respectively, in October. The marginal improvement in the manufacturing PMI in October compared to September signals that manufacturing activity improved at a softer pace in the US.

However, China reported a strong manufacturing PMI figure in October 2019. China’s Caixin manufacturing PMI stood at 51.7 in October compared to 51.4 in September. This figure marked the strongest improvement in the country’s manufacturing activity since February 2017. Faster improvement in production and new order growth mainly helped the PMI improve at a higher pace. While the US manufacturing PMI is in the contraction zone, China’s Caixin manufacturing PMI is the expansion zone. It’s creating curiosity among investors as to what’s going on between the world’s two largest economies.