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The current uptick in global GDP growth means that manufacturers in many countries are experiencing higher demand. As purchasing manager index (PMI) reports come in from around the world, they are showing supply constraints beginning to emerge. Manufacturing PMIs are surveys which ask industrial managers about various aspects of business conditions. While they are soft rather than hard data, they can be valuable for constructing a current picture — since the hard data typically aren’t available for several months.
The December manufacturing PMI for the U.S. continued to strengthen. The chart below shows the various components of the survey for manufacturers; as you can see, most are accelerating.
Data Source: Institute for Supply Management
In Europe, Germany, Hungary, the Czech Republic, and Poland were standouts, and the Eurozone as a whole closed the year strongly at 60.6 — the highest reading since the survey began more than 20 years ago. For manufacturing, 2017 was the “strongest year ever” for Europe (i.e., the strongest on record since the birth of the Eurozone in its current form).
PMIs also had strong year-end showings for some developing countries. The Indian manufacturing PMI hit its highest level in five years, Taiwan’s increased sharply to the best level since 2011, and China’s hit a four-month high.
If that trend continues, manufacturers will raise prices, which may mean that 2018 will be the year in which inflation finally begins to emerge in earnest, although it will likely remain moderate. The pressure will also lead manufacturers to make more expenditures on capital goods, and on labor — and rising wages could also contribute to the long-awaited return of moderate inflationary pressure.
These data offer further confirmation of a view that sees the current economic expansion, which began with the end of the Great Recession in 2009, now finally entering its late phase and “hitting its stride.” Partly because of the nature of the crisis that caused the last recession, and partly because of the policy responses to that crisis, the cycle seems to have been elongated, and in some respects has not followed typical cyclical patterns.
If this thesis is correct, it suggests good economic reasons behind the “extra innings” which may be in store for many global stock markets, even after the strong performance that many registered last year. As we note below, the real signs of an end to the cycle and another oncoming recession are not yet in view. We do not see rapid inflation likely, nor a rapid tightening of monetary conditions, nor an inversion of the yield curve in which short-term rates are above longer-term rates.
As we told our readers and clients last year, we continue to believe that “the bull is not dead.”
Investment implications: Strong manufacturing and nascent modest inflation would create an environment favorable to many commodity stocks, to gold, and to industrial manufacturers and manufacturers of capital goods. Benefits from tax reform should also accrue to U.S. manufacturers, and if the U.S. dollar continues in its sideways-to-falling pattern, exports from U.S. manufacturing firms will be strong. Under current conditions we favor strong U.S. industrials, and are becoming more bullish on gold and gold shares.
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