The surveys point to recession, the stock markets are uneasy, but it’s not all gloom

The latest round of purchasing managers indexes are out, and they paint a gloomy picture, both in the UK and worldwide. Stock markets are not so hot either, but it’s not all bad.

Article updated: 4 October 2019 9:00am Author: Michael Baxter

The latest purchasing managers indexes PMIs are out, and a gloomy bunch they are too.

The composite PMI for the UK — which combines PMIs on manufacturing, construction and services — fell to 48.8. Bear in mind that any reading under 50 points to contraction, and you will get a feel for how bad this reading is. The PMI tracking services fell to its lowest level since 2009.

In the Eurozone, the composite PMI fell sharply to 50.1 — not quite in contraction territory but scarily close. The PMI tracking Germany fell to 48.5, an 83-month low.

Look towards the US, and things are not much better — the ISM purchasing managers index tracking US manufacturing fell to 49.1 — a decade low.

If the PMIs were to be a 100 per cent accurate gage of the economy, then they would be telling us that the UK and Germany are in recession, and the US and Eurozone are heading that way.

No wonder stock markets have been losing ground — the FTSE 100 has lost eight per cent or so since the summer, the S&P 500 suffered big falls this week.

Fears of trade wars just keep getting more serious. Not all of it is Trump’s doing. The US has been given permission by the World Trade Organisation to slap tariffs on the EU in retaliation of subsidies to Airbus. And this case has been rattling around since George W Bush was President.

But look at the latest between the US and China, with the US now talking about shutting Chinese companies out of US stock markets. Look at the US and India. Look at the dangers of a calamitous war between the US and Iran.

On the other hand!

President Trump’s decision to fire arch military hawk John Bolton suggests that actually, he doesn’t want a war with Iran.

US manufacturing isn’t quite in the dire straits the surveys suggest — it seems that the PMI was distorted by a strike at GM.

There seems to be a consensus among economists that UK PMIs underestimated the likely impact of increases in government spending and retail recovery.

And then there is the oddity of US stock markets. For all the gloom and doom, the S&P 500 is a mere 100 points off the all-time high set in July.

Boris Johnson is planning to take advantage of extraordinarily low interest rates, to fund government spending on infrastructure.

I don’t agree with him over Brexit, but think he is right on this one. The UK is haunted by lousy productivity — output per hour worked is the second lowest in the G7. I don’t think there is a mystery as to why — you only need to take the car for a spin around the M25, or look at the signs saying ‘delayed’ at your local railway station, or for that matter try and make a phone call from a train even when it is only a few miles from London.

The UK desperately needs better roads, railways, phone signals and wider internet coverage. I don’t think spending on such areas will be inflationary in the long term, despite unemployment being so low, because such spending will improve productivity and lift output — although there might be a medium-term inflationary hit.

Such spending may stop the UK from falling into recession. For me, the only mystery is why now? Interest rates were just as low ten-years ago, productivity was just as awful. The economics of the stimulus is right, the timing is ideological.

As for investors. Well it depends. If you have a long-term time horizon, your portfolio is nicely diversified, with exposure to different sectors and different regions around the world, then you may not need to do that much. Markets go up and down — and if you try to beat the markets, by selling before a slump and buying before a boom, then getting the timing right is devilishly difficult — though, I would add, not impossible.

These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.

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