Global Macro & Strategy

Business cycle update: PMIs continue to leap higher, but so do prices (i.e. inflation)

Every month provides a mountain of data points, however as our regular readers would know, some are more important than others to the financial markets and investors. One of the more important ones that we highlight are the PMIs that come out at the start of every month. These are leading indicators of the economy and many market participants use them as proxies of the business cycle. Not surprisingly, they also correlate with other leading indicators such as the stock market, and provide visual confirmations of slow downs or turning points in the cycle.


There are two providers of PMI data in Australia (IHS Markit & AIG). As you can see in the above charts, both the IHS Markit PMI and the AIG PMI surveys, across both manufacturing and services, have accelerated to new highs in April. This visually highlights just how much the business cycle is accelerating in Australia as the post COVID recovery continues.

In fact, the Markit manufacturing PMI accelerated to the highest level since the survey began in May 2016, and was the steepest rate of expansion seen in the survey history, going from 56.8 in March to 59.7 in April . Business conditions have now improved in 11 straight months post COVID. However, supply constraints continued to feature strongly, which led to a record rise in input costs. 

Read that last line again……a record rise in input costs. Real world inflation is happening, despite what the policy makers keep telling us.

The US

In the US, there are also two providers of PMI data (ISM and IHS Markit). The ISM Manufacturing PMI actually fell sequentially to 60.7, from 64.7 in March. This is still a very strong figure and it is not unusual for the ISM to zig zag its way up when the cycle is accelerating. IHS Markit on the other hand posted new highs with the Manufacturing PMI climbing to 60.5 from 59.1 in March.

Chris Williamson, Chief Business Economist at IHS Markit summed it up very well when he said:

“US manufacturers reported the biggest boom in at least 14 years during April. Demand surged at a pace not seen for 11 years amid growing recovery hopes and fresh stimulus measures. Supply chain delays worsened, however, running at the highest yet recorded by the survey, choking production at many companies. Worst affected were consumer-facing firms, where a lack of inputs has caused production to fall below order book growth to a record extent in over the past two months as household spending leapt higher. Suppliers have been able to command higher prices due to the strength of demand for inputs, pushing material costs higher at a rate not seen since 2008.”

Again, re-read that last line………”pushing material costs higher at a rate not seen since 2008.”

The bottom line

The consistent theme out of not just these above, but also other global PMI readings, is simply this: demand continues to surge higher, however supply chain issues continue to be a problem, and input prices continue to rise. In other words, we have accelerating growth + accelerating inflation. This is the very definition of “reflation”, therefore the PMIs are signalling no change to this regime at this point in time. The other clear message from the PMIs is that costs (i.e. inflation) are surging higher at a rate not seen for many years, which is consistent with the surging commodity prices we have seen over the past year.

UPDATE 13/05/2021: The US inflation numbers came out overnight, and it was a big spike higher. The April CPI came in at a 4.2% annual rate, which was the highest since 2008. Even core inflation, which strips out energy and food costs, was up 3%. Whilst the news outlets were reporting this was a “surprise” given it was almost double what was expected, anyone who’s been tracking the monthly PMIs like we have and seeing how much input prices have been surging is NOT surprised at all. And yes, the base effects (low inflation a year ago) will have an outsized affect on the annual number, however the fact that the one month surge of 0.8% is the biggest monthly increase in 40 years is the thing that will shake up the market the most.

Author: Graham Parkes

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