The global economy was modestly improving before the coronavirus hit. It’s going to be harder to tell what’s going on for the next few months, but investors should filter out the noise.
Alan Ruskin, Deutsche Bank’s chief international strategist, looked at global manufacturing PMIs, or purchasing manager indexes, to evaluate what the global economy looked like before the viral outbreak in China. PMIs are based on surveys of executives across different parts of the economy, and they’re favorite gauges among economists because they tend to be leading indicators.
The global monthly PMI data provides a clear snapshot of improved global manufacturing before the virus hit. Ruskin points to the number of countries with monthly PMI increases versus declines, which is the strongest ratio since November 2017. He notes that the standard deviation across monthly PMIs is relatively low and thus suggestive of a synchronized (if slow) recovery.
The number of confirmed cases of the coronavirus, which emerged in the central Chinese city of Wuhan in December, rose above 20,000 this week and has so far killed at least 425 people, mostly in mainland China. It would be a surprise, Ruskin writes, if China didn’t lead some global manufacturing PMI weakness for February and probably also for March. Tim Fiore, chairman of the Institute for Supply Management, which compiles the monthly U.S. ISM manufacturing index, said as much Monday when the ISM released its January report.
But the impact on the global manufacturing economy is likely to be temporary.
“The markets are primed to look beyond exogenous shocks,” Ruskin writes, adding that there is widespread acceptance that shocks like this virus are not indicative of underlying trends and don’t tend to set in motion a self-fulfilling negative feedback loop if the economy isn’t already weakening.
Economic impacts from exogenous shocks are therefore usually fully reversed with some positive catch-up in the months after the shock dissipates, according to Ruskin. One sub-gauge of the monthly manufacturing PMIs investors might want to keep an eye on is the expected future production index. (PMIs are made up of about 10 subindexes.)
There is, of course, the chance that the virus worsens and takes a more dramatic toll on the Chinese economy and even the world economy. But if the global future production index spikes further relative to the present index—it’s currently at its strongest level since August 2018—Ruskin argues it would be a promising sign and ameliorate concerns of a more lasting hit to global output.
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