PMIs: US outperformance a sign of things to come - Capital Economics
Global Economics

PMIs: US outperformance a sign of things to come

Global Economics Update
Written by Gabriella Dickens

The flash PMIs for January suggest that the US economy shrugged off containment measures at the start of 2021, but that restrictions did indeed weigh on activity elsewhere in DMs. The surveys also provide some evidence that supply shortages are exerting upward pressure on input costs for manufacturers.

  • The flash PMIs for January suggest that the US economy shrugged off containment measures at the start of 2021, but that restrictions did indeed weigh on activity elsewhere in DMs. The surveys also provide some evidence that supply shortages are exerting upward pressure on input costs for manufacturers.
  • January’s flash PMIs point to the DM composite PMI holding steady at 52.0. However, the stability in this aggregate index fails to convey the divergence between the US and other DMs. (See Chart 1.) To every forecaster’s surprise, the US manufacturing PMI rose to its highest level on record, while the services index reversed most of last month’s decline from a five-year high in November. By contrast, in Japan and Europe, the laws of gravity still seem to apply – tight restrictions do appear to have taken their toll on economic activity this month, especially in the UK, where the composite PMI fell by ten points to just above 40.
  • We are not surprised that the US economy has held up better than Europe in the opening weeks of the year, but the resilience of its PMIs is still a bit bewildering. Note that the US PMIs have not been a reliable gauge of economic momentum in recent months. Indeed, the persistent strength of the surveys has not chimed with the weaker hard data over winter. While we wouldn’t read too much into the precise level of the US PMIs, the point to take away is that the US enters 2021 on a much stronger footing than other DMs.
  • Stepping back from the contrast between countries, the PMIs are consistent with our view that the fallout from the latest round of restrictions will be much smaller than it was in Q2 last year throughout advanced economies. Even the 40 reading of the UK composite PMI was still way above its trough of 13.8 in April. Another takeaway from today’s figures was that January saw a continuation of industry’s outperformance of the services sector. (See Chart 2.) Given that virus-related restrictions continue to be concentrated on the services sector, we expect this pattern to endure in the coming months.
  • Finally, a further fall in the suppliers’ delivery times index to 35.6, in conjunction with a sharp rise in global shipping costs over the last couple of months, suggests that supply shortages have intensified. (See Chart 3 and here.) And according to the input price indices, this has begun to push up firms’ costs. (See Chart 4.) We suspect that these cost pressures will be short-lived and partially absorbed within firms’ margins. But these add to a growing list of factors that point to a rise in inflation over the first half of 2021. (See here.)

Chart 1: Composite PMIs

Chart 2: DM Services & Manufacturing PMIs

Chart 3: DM Mfg. PMI: Supplier Delivery Times

Chart 4: Composite PMIs: Input Price Indices

DM PMI data for January are CE estimates based on US, EZ, JP & UK.

Sources: Refinitiv, IHS Markit, Capital Economics


Gabriella Dickens, Global Economist, gabriella.dickens@capitaleconomics.com
Simon MacAdam, Senior Global Economist, simon.macadam@capitaleconomics.com