The PMIs Point Towards Spring
Over the past year or so goods spending has been notably weaker than service sector spending, in part because of weakness in intermediate goods. That is a sign of firms trying to reduce excess inventories. That process tends to finish when either manufacturers have cut inventories to the bone, or become more optimistic about future demand, or both. The January PMIs for manufacturing strongly suggest that this is what is happening now.
On the one hand new orders data remains mostly below 50, signaling output contraction, but optimism about future output has been increasing more or less in tandem with lower energy costs. At the same time New Orders have just begun to turn higher, confirming that downward pressure on output has started to ease.
Across 36 countries, 78% saw their manufacturing New Order indices rise in January, compared to just 36% in October last year. The proportion of countries with New Orders above 50 has also been recovering since November reaching 36% in January. In Macro-Seasons terminology, this is pointing towards spring. (Low but accelerating output).
A feature of the next stage of the cycle is likely to be that the US trades places with China and Europe in terms of growth momentum. The charts below show how Chinese New Orders have overtaken that of the US, while in Germany (a high-beta version of the Eurozone recently), they have finally re-converged.