Looking at the synthetic indices in February, a convergence can be seen between the Euro Area and the USA. That’s what is shown by the first chart. There is a real improvement in the Euro Area with a PMI index which is above 50 since last August. The momentum is on the upside. In the USA, the drop seen in the index reflects the climate impact during the first two months of this year.
In terms of growth, this means a stabilization of the growth number in the first quarter in the Euro Area (close to the change of 0.3% seen in Q4) but probably a downward revision for the USA.
The two following charts show the link between surveys and GDP profile in the two economies. We can see the improvement in the Euro Area and the downward trend in the USA. For this latter this is, for me, a temporary phenomenon due to the weather in January and February. Strong capital goods orders for January are an illustration of this temporary phenomenon. This means that companies want to continue to invest as they perceive that the weak situation is only temporary. With this in mind, I expect a rebound in Q2 GDP growth but the whole year growth forecast will be revised down due to the weakness of the first quarter . This means that the US economy is still strong and stronger than the Euro Area economy. But the convergence in February was amazing.
In February, the spectacular drop of the ISM non-manufacturing index reflects a contraction of the employment index. The chart below shows the monthly contribution of each sub-index to the synthetic non-manufacturing index. The explanation given, by ISM is a reduction in costs and still low expectations.
In these surveys, the most interesting part is in the part reflecting the manufacturing sector momentum that was published last Monday. There is an improvement in the developed countries which is consistent with the acceleration seen in world trade.
The PMI/Markit synthetic index (red line on the chart below) is on the rise in February at 53.3, its highest level since April 2011. The perception of the chart is that since last summer most of the indices are trending upward. This is the case for industrialized countries. For the BRIC (Brazil, Russia, India, China) the index is still below the threshold of 50 under the influence of China and Russia.
In developed countries, the index in the United Kingdom, in Japan and even in the Euro Area are stabilizing after a rapid and long improvement. New orders momentum is still high in these countries and this should lead to a prolonged period of growth. This will be specifically the case for the Euro Area. A chart below shows the consistency of flows of orders and 3 month change of the industrial production index. This should lead to higher production during the first half of this year. (see the chart in the French version of this note which gives more details on the manufacturing sector momentum see here the fourth chart)
In the United States there is still uncertainty due to the weather and the cold period seen in January and February. On the chart this can be seen with the drop in the ISM index from 56.5 in December to 51.3 in January. The dynamic was stronger in February and the synthetic index was back to above its historical average. So there is no break.
The improvement of the developed countries’ indices is consistent, since last summer, with the acceleration in world trade. We can see, on the second chart below, that during the third and in the fourth quarters, world trade dynamics was stronger. The main point here is to notice that most of trade is done for the manufacturing sector. This recovery process could converge to a virtuous loop between production and trade. This is what everyone has in mind concerning the current recovery.