China's economy is slowing This chart shows the change over six months in China's volume of industrial production. The recovery which began in mid-2024 has aborted, probably because of Trump's tariffs. Domestic policy missteps didn't help either. The usual route China has taken in the past, namely, to overstimulate property development, is closed because there is a huge oversupply of housing (from previous stimuli), and house prices are still falling. I presume the government will step up stimulus soon.

China's economy is slowing

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Stagnation continues in Big-5 in January There was a slight uptick in the big-5 whole economy PMI in January (provisional data), but the trend remains down. All three PMIs remain above the 50% recession line, but not by a lot. Implication: stagnation continues. We'll get a slightly better picture when S&P Global releases PMIs for Brazil, Russia and China. The Big-5 PMI is the GDP-weighted average of PMIs for the USA, the UK, the eurozone, Japan and India.

Stagnation continues in Big-5 in January

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Dear Goddess, this will play havoc with markets. Trump is *insane*

Recession, here we come.

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US labour market still weak The BLS labour market data for December were released overnight (my time zone). Payrolls continue to slide. --- The ADP data only cover the private sector The estimate for the unemployment rate for November was revised down slightly, and in December, it was estimated to have fallen. But remember, economic time series data always get revised. I wouldn't get too excited about this (but see the second last chart, below) The change in the unemployment rate over 6 months correlates well with the cycle. I've plotted it inverted, as unemployment goes up when the economy is weak, and down when it's strong. So far, it looks as if it's still weakening, i.e., the trend in unemployment is still up. The "Jobs hard to find" component of the University of Michigan consumer confidence survey is continuing to surge. Not a good sign. However, the whole-economy ISM (the unweighted average of manufacturing and services ISM indices) is rising. It leads the change in the unemployment rate by a couple of months. So it is _possible_ that the unemployment rate may have stopped rising. Overall conclusion: not recession, but most likely stagnation. The chart below shows the whole-economy PMI for the last 40 years. Notice that in every previous cycle, when this time series turns up, it keeps going. Over the last two years, it's just phaffed around and is no higher than it was in 2022, and continues to zig-zag around the 50% "recession line". In a word: stagnation. Has it turned up for this cycle? Perhaps. But uncertainty is always a killer for economic growth. If you have lots of questions about economic and political policy, you spend less, you hire fewer people, you don't invest in plant and equipment, and you postpone decisions. There's nothing to suggest that this environment has changed. Who knows where tariffs are going? Who knows just how badly consumer spending will be affected by the removal of health-care subsidies? Who knows how much inflation will rise because of tariffs and the deportation of agricultural workers? Caution, right now, is good policy. Incidentally, that also implies that labour lay-offs will also be limited. Firms won't hire or fire. (Exception: small companies, which right now are firing) The time to panic will be if/when lay-offs start rising.

US labour market still weak

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No reason to raise rates in Australia Australia's official inflation rate fell in November. By the way, our CPI data are now monthly. Previously, the official indices were quarterly, because not all components were sampled monthly --- the monthly data were subsidiary to the quarterly data, and subject to revision. Now it's the other way round, with the quarterly data now derived from the monthly series, bringing Oz in line with most other countries. The slight fall in inflation led, of course, to the market gurus postponing their projected rise in the cash rate. I wasn't convinced in my last report that the RBA needs to raise rates, and I remain unconvinced now -- see the charts below the inflation chart. Although household spending is recovering, the others are all weak. And a composite index of these five indicators, shows a post-recession recovery which has faltered. Raising the cash rate would be a bad idea. The only factor pointing towards a strong Ozzie recovery is metal prices, which are surging. Coal and oil and iron ore are not (coal and iron ore are our major mineral exports), which is significant, because metals and minerals do tend to move in tandem during commodity booms. The boom is confined to lithium, nickel, base metals and precious metals. How sustainable is this oddly concentrated commodity price run? How much is due to heightened risk from Trump and consequent hedging by Central Banks and investors? One is led to suspect this because world growth is not exactly robust. And since the oil price is _falling_ *, not rising, the effect of the commodity cycle on inflation here and elsewhere, will be limited. The Reserve Bank is no doubt thinking hard about all this. However, even though I think the RBA shouldn't _raise_ the cash rate, it certainly shouldn't _cut_ it, until we have greater clarity on commodities. In my last analysis, I said I would produce some charts to show that the economy is weakening, but never got round to it. Here they are. --- The unemployment rate continues to drift higher --- Job ads stopped falling at the end of the recession, but they have resumed their decline --- Real household spending is picking up --- A composite index of the 5 indicators from the charts above suggests a post-recession rebound, followed by stagnation. * The most likely reason oil prices aren't rising is because the rise in EV sales and ownership in China mostly, but also elsewhere, is reducing oil demand.

No reason to raise rates in Australia

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Europe's PMI turns down The dotted lines show the PMI indices for manufacturing/services for the Euro Area, each extreme-adjusted (by me) to remove "spikes". The solid red line shows the average of the other two. Up to two months ago, the red line had been rising, pointing to an economic recovery. Normally, manufacturing and construction lead services, and the manufacturing PMI has been falling, so the fall in the services PMI probably isn't a fluke, but a response to the downturn in manufacturing, China's PMIs have picked up fractionally, but Europe's, the USA's, Brazil's and Canada's manufacturing PMIs are falling, with most other countries' going sideways. Again, not recession, at least not yet, but clearly stagnation.

Europe's PMI turns down

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US manufacturing weakens As always, if you average two (statistically) independent time series, the standard deviation of the average is less than either of its components. This is why I like to look at an average of the ISM and the PMI surveys, which are the two earliest data released after the end of the previous month for the US economy. That is the green line in the chart below. In addition, to further reduce random fluctuations, I have extreme-adjusted both series. The ISM manufacturing survey has been falling (more or less) since January, whereas the PMI has been rising. Now both are declining, and the average has slipped back below the 50% recession line. This is just manufacturing (the services data are due in a couple of days). But it points to ongoing weakness in the US economy.

US manufacturing weakens

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Philly Fed and Empire State turn down I mentioned this indicator (the average of the Philly Fed and Empire State surveys), recently. It only covers part of the US, and is "spiky", but, smoothed, it correlates with the ISM survey, which covers the whole of the US. The reason I mentioned it was because it was one of the few time series which was rising, and I wanted to caution you that not all indicators pointed towards recession. However, over the last 2 months it has turned down, to make it more consistent with other indicators. In fact, the average of all five of the Fed's regional surveys has started to slide: --- PERDK stands for Philly Fed, Empire State, Richmond Fed, Dallas Fed & Kansas Fed

Philly Fed and Empire State turn down

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Another leading indicator plunges This has been a reliable leading indicator of the economy for nearly 60 years (see So, Happy Campers, a recession?) Heavy truck sales are now almost as weak as during the Covid Crash or the 2000 recession, and clearly heading south. This shows the time series over just the last 4 years. Note again the pattern which keeps on emerging---an incipient rise/levelling off at the end of 2024, and a subsequent renewed downturn in 2025. Does this mean recession? It's not inevitable. But it certainly looks bad.

Another leading indicator plunges

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The US economy hits the brakes Here's another indicator for the USA, showing how a recovery began, but has died. The series depicted is my own US coinciding index, which is designed to coincide with the economic cycle. You can see how growth slowed to the trough in 2023, started to pick up in 2024, and really accelerated in late 2024 and early 2025 before sliding again. Again, the slowdown up to 2023 was caused by the Fed raising rates, the recovery since then was caused by the diminishing impact of the rise in rates and the increasing impact of falling rates. And the plunge since April is due to the uncertainty and damaging effect of Trump's tariffs and other policy initiatives.

The US economy hits the brakes
Here's another indicator for the USA, showing how a recovery began, but has died.

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US unemployment rate jumps The BLS (Bureau of Labour Statistics) has produced new estimates for labour market data for November. Because of the government close-down, there are no October numbers, so I have interpolated the gap. This is the unemployment rate: Observe how the unemployment was rising (in other words, the economy was weakening), then started to fall in the second half of 2024, before rebounding again after January. The last time it was this high was in 2021 as the economy recovered from Covid. If you take the _change_ in the unemployment rate, it is strongly _negatively_ correlated with the state of the economy: when the economy advances, the unemployment rate falls, and vice versa. The chart below shows the _change_ in the unemployment rate, inverted, so the line in the chart falls when unemployment is worsening, and rises when it is improving. I have done this so it is consistent with the direction the overall economy is moving in. So, through 2023 and the first half of 2024, we can deduce that the economy was deteriorating, then it started to improve, before once again worsening after Trump's tariff _débâcle_. How does this look compared with a completely different indicator of the economy? I have used the whole-economy ISM (service plus manufacturing) as a good proxy to the state of the economy, and put the change in the unemployment rate and the ISM on the same chart. Note how the whole-economy ISM slightly leads the change in the unemployment rate. The ISM has had a small rebound since June, but looks as if it might have peaked. This means that the change in the unemployment rate might also have peaked, temporarily. That does not mean that the unemployment rate will start falling--it may well just go sideways for a couple of months. Indicator after indicator gives us the same pattern: a nascent recovery as the economy shrugs off the previous rise in interest rates, and starts to respond to their fall; a recovery which aborts as Trump's tariff mess cuts economic activity and reduces confidence. The chart below shows this pattern too. It is my private sector data index, which I constructed when official government data were not being produced, but which I have found useful even now that data are being made available again. The chart shows the year-on-year change in this index. Note the peak in late 2024, and the slump since then. The data are unambiguous: the US economy is slowing. Whether it goes back into recession isn't clear, but at the least there will be stagnation. The markets are convinced that the Fed will cut rates again, which I think is very likely. However, this market belief is not leading to falling bond yields and rising stock markets as it normally would, but instead to a falling US dollar and surging precious metal (gold, silver, platinum and palladium) prices, suggesting that the markets also think that inflation is going to be trending up. In a word: stagflation.

US unemployment rate jumps

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Economic growth is fizzling out China has just released its official year-on-year industrial production growth rate for November (4.8%, down from a peak of 7.7 % in March). November's data for US and EA (Euro Area*) industrial production are only available through October 2025. I have a function which estimates additional month(s) of data for a time series. It calculates the next month via three different techniques and uses the average of these three values as the forecast. I have thus been able to estimate an average for industrial production for China, the US and the Euro Area through November. The chart plots the 6-month rate of change at annual rates in the unweighted average. These are the three largest economies/economic zones in the world, and allowing for Chinese overestimation of GDP, are roughly equal in size. The 6-month rate of change is slowing for all three zones: China peaked in December 2024, and has been decelerating since; the US peaked in June this year; and the EA in April this year. Growth for the average of the 3 is still positive, just, but the trend is down. Note again the pattern: an accelerating recovery in the world economy from Q4 2024, fizzling out as Trump's tariffs disrupt economies and increase uncertainty. How low can it go? Well, there is the powerful (lagged) influence of falling interest rates, which should be holding the world economy up, offset by the more immediate impact of the increased uncertainty and trade reductions of the tariff war. So we may see stagnation rather than recession. *EA = Euro Area/Euro Zone, i.e., the countries which have the Euro as their currency.

Economic growth is fizzling out

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The coming AI crash From Owen Jones, talking to Professor Steve Keen, who correctly forecast the GFC. He reckons the current AI boom will fizzle out within a year, to be followed by an AI bust as AI takes over more and more jobs. He points out that a UBI will be essential, or people will starve to death, and there will be severe civil unrest, a dystopian "Hunger Games" scenario. A new Great Depression, leading to massive economic and social change.

The coming AI crash

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US leading indicators signal recession For various reasons, I haven't calculated my US cyclical indices for a year or more. But I've finally updated my US data banks and psyched myself up to do the calculations, so, here goes. The chart below shows the year-on-year percentage change in my US coinciding and my US leading indices. They are calculated from many underlying time series and are designed to remove some of the noise caused by the plethora of indicators which move in different directions each month, and that way to give clarity about the direction of the economy. I have plotted my leading index with a 12-month lag. This gives us an implicit forecast of the economy's direction over the next 12 months. Observe how covid screwed up the lags, which is logical, because the covid crash and the recovery from covid were caused by exogenous influences, not by movements in the economy itself. Note how the percentage change in my leading index is falling fast, suggesting that over the next 6-12 months the economy will be weak, or in recession. The chart below compares my US coinciding index with my US diffusion index. A diffusion index measures what percentage of a universe of monitored time series is rising. In this case, the universe is 57 different time series, almost exclusively monthly. When all are rising, the economy is strong. When all are falling, it's in deep recession. It's been smoothed using a 12-month centred moving average to iron out the monthly ebbs and flows. It leads the cycle by about 5 months. The unsmoothed diffusion index ticked up in November, but (a) that's based only on those data which were available, and (b) small blips in diffusion indices can be revised away as more data become available, and (c) it's just one month. However, if this is the low for the diffusion index, it nevertheless indicates that, for at least the next 5 or 6 months, the US economy will be slowing. None of these indices gives pin-point timing or extent of the swings in the business cycle. However, they do give strong rough indications of what's happening. My guess is that the US economy will be weak or even declining until the middle of next year. But as I have said before, this is the first recession in my long professional experience caused by the extreme incompetence of the party and politicians in office, and by damaging policies, rather than by the strong ebbs and flows of the economy, so who knows?

US leading indicators signal recession

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US layoffs still trending up The latest data from Challenger show that layoffs fell in November, after a spike in October. These data are not seasonally adjusted, and also show large month to month "spikes". So I have fitted a centred 5-month moving average to the data. This moving average (see chart below) points to a big jump in layoffs after Trump's election, an improvement up to July and deterioration since then. I have estimated a provisional seasonally-adjusted version of the Challenger layoff data, and it produces the same pattern. [Why not a _final_ seasonally adjusted series? Because I want to run some statistical tests, to confirm seasonality, and it's late at night, so that will have to wait for tomorrow. Meanwhile .....] If you look at the average of the unadjusted data over the last 12 months, the last time layoffs were this high was during the Covid Crash, and the time before that was during the GFC in 2009! Don't be misled by one month's improvement. The trend is still bad: layoffs are rising, despite the apparent drop in November. --- Note inverted scale for job cuts

US layoffs still trending up

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US private data index suggest ongoing weakness I've updated my US private data index, originally created to fill the gap caused in public data by the prolonged shutdown. I've also added another constituent time series, the "optimism" index from Real Clear Markets, and I've extended the calculation back to 2010. Note how the index plunges after the Fed raised interest rates, then started a recovery in late 2023, and fell sharply after Trump came to office. It's still falling. Doesn't look as if employment will be growing fast any time soon. And this is what the year-on-year change in the index looks like. One struggles to describe this as a "strong economy". Observe that all the trends are still down. The chart below shows the sub-indices in the ISM whole economy index, for prices paid and employment. The surge in inflation appears to be over, but the ISM employment data suggest that employment is weakening. Again, note how it had started picking up only to fall in a heap since January

US private data index suggest ongoing weakness

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