December flash PMIs signal worsening economic growth, cooling price pressures

Flash Purchasing Managers' Index survey data for December showed the pace of economic growth weakening across the developed markets on average to register one of the steepest declines since the global financial crisis.

Although there are some variations by country, with parts of Europe in particular showing signs of a milder recession than previously anticipated, the general trend is one of falling demand accompanied by healing supply chains. Job growth has cooled markedly as the need to work through an unprecedented backlog of work goes into reverse. As such, the environment appears to be shifting from one of strong inflationary forces this time last year to one where disinflationary forces are starting to dominate.

6th successive monthly contraction of developed world output

The flash Purchasing Managers' Index, or PMI, data indicated a further deterioration in the health of the global economy at the end of 2022.

Collectively, the survey data covering the U.S., eurozone, U.K. and Japan pointed to output falling across the major rich-world economies for a sixth successive month in December. The rate of decline accelerated to the highest since August and, excluding the initial pandemic lockdowns, was the steepest since the series' inception in October 2009.

Output fell at similar rates in aggregate across the manufacturing and service sectors of the four main developed economies. Manufacturing reported a slightly slower rate of contraction, while the service sector decline accelerated slightly.

Trends were mixed within the four major economies, however, with an accelerating downturn in the U.S. contrasting with moderating rates of decline in the eurozone and the U.K. Meanwhile, business activity stabilized in Japan after having slipped into decline in November.

Comparisons with official statistics suggest that the PMI data is consistent with the U.S. economy contracting at a quarterly rate of approximately 0.4% in the fourth quarter. More modest declines of 0.2% are signaled for the eurozone and 0.3% for the U.K. Modest growth is indicated for Japan.

While manufacturing output fell across all G-4 economies, led by an accelerating decline in the U.K., service sector activity trends were more varied. Service sector output rose slightly in Japan and stabilized in the U.K., with a moderating rate of decline seen in the eurozone. In contrast, service sector output fell at an increased rate in the U.S.

Supply delays ease

A consequence of the downturn observed in the major developed economies, and in particular manufacturing, is an easing of supply chain constraints.

While the pandemic had been characterized by shipping delays and shortages of raw materials and goods around the world, this situation is reversing. Many of the logistical issues from the pandemic been resolved, and demand for many goods and raw materials is falling. Hence, supply chains are healing and suppliers are less busy.

December saw average supplier delivery times shorten for a second month running in the U.S. and shorten for the first time since the pandemic began in the eurozone, led by a notable improvement in Germany. Supplier delays also eased sharply in the U.K. and, to a lesser extent, Japan.

In all, the latest supply chain developments represent a contrast to the unprecedented supply delays from throughout 2021 and into the early months of 2022.

Price pressures fall sharply

This combination of falling demand and smoother supply chain activity took pressure off prices in December. Average prices paid for inputs by manufacturers across the G-4 rose at the slowest rate for two years.

A further weakening of price pressures can be anticipated in the coming months, given the current environment of supply and demand. The surveys are generally pointing to the shifting from a sellers' market to a buyers' market, a process that is being further supported by evidence from the PMI surveys of factories moving from a position of inventory building to cost-cutting inventory reduction.

All G-4 economies reported slower manufacturing input cost inflation, with the U.S. reporting by far the steepest easing. Japan saw price inflation remain more persistently elevated.

Service sector input cost inflation rates have moderated in the U.S. and in Europe, with the U.S. seeing an especially steep decline in the rate of increase. Japan was an exception, reporting a slight uptick in service-sector input cost inflation amid ongoing supply-side constraints, but these constraints are showing signs of calming in the U.S. and Europe alongside lower energy prices.

Weaker jobs growth

A development helping to moderate input cost inflation, especially in services, has been a cooling of labor markets. A cooler labor market has taken upward pressure off wages in many cases.

Whereas the pandemic had seen companies struggle to find workers, leading to a large rise in backlogs of work, these backlogs are now falling across the major developed economies at a rate not seen since the global financial crisis, excluding initial pandemic lockdown months. Hence, companies are now taking a more cautious approach to hiring, with the overall rate of job creation in the G-4 economies slipping further in December. This modest pace of job creation was the lowest since the early months of 2021.

Jobs are being cut in the U.K. for the first time since the early months of the pandemic, and recent months have also seen the slowest job gains in the U.S. and eurozone recorded over the past two years.

6 key reversals

The survey data is therefore indicating a major reversal of six important economic trends in the developed markets compared to this time last year.

First, output has deteriorated from a position of surging growth to registering the steepest downturn since the global financial crisis, barring only the early months of the pandemic.

Second, demand for goods and services, buoyed this time last year by the reopening of economies from the pandemic, has turned strongly negative, with spending eroded by the surging cost of living, the energy crisis (linked to the Ukraine war) and rising interest rates, as well as inventory reduction policies.

Third, unprecedented shortages fueled by a lack of materials and labor during the pandemic are now being replaced with excess supply in many instances, with increasing numbers of companies even reporting the need to reduce inventory due to the accumulation of excess stocks amid lower-than-expected sales.

Fourth, backlogs of work — driven up at record rates by shortages — are now falling, pointing to excess operating capacity.

Fifth, widespread demand for labor to help reduce backlogs of work is switching to a more cautious hiring approach and, in some cases, leading to falling employment.

Sixth, surging price pressures associated with soaring demand and supply-side constraints are giving way to weakening price pressures, with growing instances of discounting in order to stimulate sales and pare back unwanted inventories.

All of the above therefore suggest that an economic slowdown is leading to the build-up of disinflationary factors. There are some caveats, notably the possibility of resurgent global supply chain issues emanating from COVID-19 in mainland China and a possible spike in energy prices amid an escalation of the Russia-Ukraine conflict or adverse winter weather. It is also possible that we are seeing some bottoming out of the downturn in Europe, though it is far from clear that the recent PMI data improvements in the U.K. and eurozone represent a turning point, especially as the Bank of England and the European Central Bank continued to tighten policy aggressively by historical standards in December. The impact of these rate hikes, and a further rate rise in the U.S., has yet to feed through to the economy, posing downside risks to growth. It remains to be seen whether this aggressive stance is maintained in the coming months if the official data on economic growth, inflation and the labor markets follow the trends signaled by the PMI surveys.

For interest, a history of lagged policy responses to survey data and misleading signals from official data at key periods of policymaking can be found here:

Case study: PMI data sent early signals of GFC impact on Eurozone GDP | S&P Global (spglobal.com)
Case study: anticipating the UK recession during the global financial crisis | S&P Global (spglobal.com)

Purchasing Managers' Index data are compiled by S&P Global for more than 40 economies worldwide. The monthly data are derived from surveys of senior executives at private sector companies, and are available only via subscription. The PMI dataset features a headline number, which indicates the overall health of an economy, and sub-indices, which provide insights into other key economic drivers such as GDP, inflation, exports, capacity utilization, employment and inventories. The PMI data are used by financial and corporate professionals to better understand where economies and markets are headed, and to uncover opportunities.

Data and insights for this article were compiled by Chris Williamson, chief business economist for S&P Global Market Intelligence.