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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World PMI very sluggish This is my calculation of world manufacturing PMI, compared with J.P. Morgan's calculation. I only started keeping the J.P. Morgan data in 2011, which is why I needed to make my own calculation to understand previous cycles. Where I don't have back data for individual countries, I have used manufacturing business confidence, and estimated what each country's PMI would have been if it had been calculated by IHS Markit (which used to publish PMI data before S&P Global took over.) In some cases, I have smoothed the input series (some, such as ABSA's PMI for South Africa, or the AIG PMI for Australia or Canada's Ivey survey, are very "spiky", i.e., have large month-to-month random errors.) In other cases, I have extreme-adjusted the series before I used them to calculate my estimate of world PMI. This mostly, in effect, reduced the down spike from COVID, but had some small effects elsewhere. Why this chart is interesting is because, hitherto, in all recoveries, from deep recessions or shallower slow-downs, the rebound has been sharp. This cycle, it's been a slow, and not especially steady ascent. Observe that it actually began a steep-ish recovery at the end of 2023, before it fizzled out. Obviously, Trump's tariff tango has something to do with this, but I suspect there's more to it. Inflation isn't falling like it should be when the economy is so sluggish, and part of the reason for that is the growth of monopoly and oligopoly is the US, and the West's determination to stop China exporting its deflation to the world, particularly in cars, solar panels and batteries, via tariffs and quotas. Why was inflation lower before Covid, when manufacturing was just as concentrated as it is now? Because everybody expected inflation to remain low. But in the Covid rebound, firms found that they could indulge in a bit of "greedflation", and pushed up their margins, and expectations have accordingly shifted. Monopolies and oligopolies now know they can shove up prices every year by more than they used to, and get away with it. To use more technical terms, inflation over the last few years has been more cost-push than demand driven. Sluggish growth may well continue, even though Europe is clearly (finally) recovering. But higher inflation means that Central Banks will be reluctant (=slow) to cut interest rates. And if the AI bubble pops, the US _will_ go into recession. If that happens, the US dollar will plunge, pushing other economies themselves into slow-downs or recession. Of course, happy days may be here again. But I hae me doots.

World PMI very sluggish

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US manufacturing stagnates As usual, the line to watch is the thick green one, which should have less variability than either individual index. (Both indices are extreme-adjusted, but that mostly just reduces the down spike caused by covid in 2020.) Right now, the manufacturing PMI index is rising while the manufacturing ISM index is falling. This divergence in direction hasn't happened before. In 2017/18, a gap between the levels of these two indices did open up, but their direction was roughly the same. But since late 2025, the PMI has been rising, while the ISM has been falling. Which is "correct"? We won't know for another few months. What we do know is that the average of the two is flat, and only just above the 50% "recession line", in other words, stagnating. If you feel compelled to go with the "better" index, that's prolly the ISM*, which goes back to 1947, when it was called the NAPM* index. It has correlated well with every major and most minor business cycles since then. And it looks as if it's falling. *NAPM = National Association of Purchasing Managers. ISM = Institute of Supply Management. I suppose they thought that sounded a bit grander.

US manufacturing stagnates

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Oz's headline inflation picks up Australia's inflation rate has picked up, but that (mostly) is not a sign that inflation really is increasing, but is rather a result of state initiatives to reduce electricity bills with subsidies. When subsidies were introduced, headline inflation fell, and now they've expired, it's risen. However, it's above the top of the RBA's inflation band (2 - 3 per cent), so the chatter is that the next rate change will be up instead of down. I'm not so convinced. Even the RBA* can't ignore the obvious signs that the economy is slowing. And it's quite likely that the Federal government will introduce a new subsidy for electric bills in the next budget in March. The cost of electricity is a hot topic, with the Right blaming renewables, and everybody else pointing out that prices are set by the highest-cost supplier, which is gas. So the sort-of-left-ish government, the Australian Labor Party (ALP) wants to defuse the agitation from the "Liberal" (= right-wing) opposition about the shift to renewables, and will prolly introduce a subsidy to cut the pain of high electricity prices while they wait for their painfully slow roll-out of renewables to take effect. Coming back to the economy, my next post will be about how the Ozzie economy appears to have started to slow again, so it would be perverse of the RBA to raise rates. But then, they haven't exactly covered themselves with glory over the last few years, so who knows. --- The ABS (Australian Bureau of Statistics) has now switched completely from quarterly CPI indices to monthly. The monthly indices are now the official CPI. *RBA = Reserve Bank of Australia

Oz's headline inflation picks up

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A very clear slowdown in China A very clear slowdown. (See China's manufacturing PMI heads south) Europe is (more or less) still recovering, though I would not describe it as a runaway boom. But the US is sliding. Plus, China's slowdown is forcing the country to export deflation as her industry tries to survive the domestic crunch. _Quelle pagaille_ ! Trump's tariff tango is endangering the world economy. The world's two largest economies are at best stagnating. And the trends don't look good. [Technical note: Most Chinese economic time series are affected by the peripatetic Chinese New Year, which can be in January or February. The NBS (National Bureau of Statistics) often does not publish data for January and February, or publishes an average for the two months. Seasonally adjusting these time series is difficult. This is complicated further by China's publishing industrial production as a year-on-year change, not as an index. Estimating an index was made more tricky by successive Covid lockdowns. I have found that my seasonal adjustment program was not completely removing seasonality because of these problems. So I have adjusted somewhat the method of calculation for Chinese IP, by seasonally adjusting my estimated IP index _before_ and _after_ covid separately. In addition, I have fitted a centred 12-month moving average to the resulting time series. By definition, a 12-month moving average contains no seasonality. The rate of change I show is calculated from the _average_ of my seasonally adjusted index _and_ the 12-month centred moving average. I hope this still leaves enough variation to detect change in business cycle trends, without being misled by spurious seasonality.]

A very clear slowdown in China

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Big 5 expansion slows The big 5 PMI index is a GDP-weighted average of the US, UK, Japan, India and Euro-zone PMIs. The big 5 make up just over 50% of the world economy using purchasing-power parity for the currency conversion. The whole-economy PMI is an unweighted average of the manufacturing and the services PMIs. It should roughly parallel GDP growth. The match isn't perfect, but it's usable. The PMI tends to lead GDP, partly because it's a diffusion (momentum) index. The index has levelled off, with most of this decline due to weakness in the big-5 manufacturing index, except for the UK. Even the Euro zone, which had had a strong recovery in manufacturing, is now sagging, presumably a consequence of Trump's trade war. Services are holding up better, with the result that over the last couple of months, the average of the two has been flat. The whole-economy PMI is above the 50% recession line, which suggests the economy is still expanding, though not rapidly. However, the expansion will prolly be enough to slow interest rate cuts. --- Click on chart to see it more clearly "Weighted average" means weighted by PPP GDP.

Big 5 expansion slows

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US stagflation? I've talked before about my composite index made up of private sector time series. The aim was to provide some sort of indicator while official government data were not being produced due to the shut-down. Now that the shut-down is over, the BLS has released payrolls data for September, and I've also updated my index with NFIB (small business) components. The next update will be in the first week of December, when more of the component series are released. The chart below shows my index versus the 3-month change in non-agricultural payrolls. I have only shown the data from the beginning of 2022 onwards, to exclude the huge swings caused by Covid. I wouldn't be surprised if payrolls continue to barely grow, or even go negative. This is consistent with the steady rise in the unemployment rate. Will this be combined with rising inflation, too? I suspect the answer is yes. That's called "stagflation", and the public doesn't like it (bad for Trump and the Republicans); the markets don't like it (bad news when share markets are so over-extended) and it makes the Fed's job very difficult (easier to make a mistake).

US stagflation?

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US PMIs: growth OK-ish, prices not. The latest PMI data for the USA show that the economy is still advancing, perhaps a little more slowly. S&P Global's comment on prices suggests inflation is likely to pick up: > **Input cost inflation accelerated sharply in November, hitting the fastest rate for three years barring the jump in costs seen in May. Tariffs were again the predominant reason cited by companies for increased costs, alongside reports of higher wage rates. Service sector costs rose at the fastest rate since January 2023. In contrast, manufacturing input price inflation cooled to the lowest since February but remained well above the average seen over the past three years.**

US PMIs: growth OK-ish, prices not.

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Will world interest rates fall further? This chart shows the GDP-weighted world central bank discount rate (bank rate/Fed Funds rate/central bank lending rate) covering 83% of the world economy, as well as the median of world interest rates that I monitor . The median is the point in a series of data values at which half the observations are above and half below. It is unweighted. The two different kinds of average interest rates usually move in more or less the same direction, though not always. The GDP-weighted average will be dominated by the largest economies, the median is skewed more towards smaller economies, because they are more numerous. Note how the median interest rate rose much more than the average before the 2009 GFC, likely making the recession worse; and how the jump in the median rate in 2011-2012 signalled that smaller economies were in trouble, worsening the downturn linked to the euro crisis. Right now, the median is falling faster than the GDP-weighted average, which is consistent with my "small 15" average PMI index, which has been much weaker than the "big 8" index. Will interest rates fall further? Well, yes, but not by much. The ECB (European Central Bank) seems happy with its bank rate; the Fed is muttering about not cutting rates again; and the "small 15" PMI is rising fast, meaning smaller economies have become more reluctant to cut rates. At the same time, world inflation has levelled off after falling from the post-Covid highs. What is certain is that the low interest rates of the 2009 to 2021 years will not be reached again in this cycle. Unless the AI-bubble pops ..... --- Clicking on the chart will make it easier to read.

Will world interest rates fall further?

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My private sector index looks ..... terrible I've updated my composite index of private sector data sources. They now are (equal weights): 1. The whole-economy ISM index 2. The whole-economy PMI index 3. The University of Michigan consumer sentiment index 4. The Conference Board's consumer confidence index 5. The LMI logistics index 6. ADP's monthly job change 7. Challenger's monthly job losses 8. "Jobs easy to fill", from the NFIB survey (data only through September; October values out this week) 9. "Jobs are plentiful" from the Conference Board survey I've plotted the resulting index after extreme-adjusting it, mainly to remove the massive down-spike during the Covid Crash. It looks more bearish than my previous index. In fact, it looks terrible. [Here is my first piece about my private sector data index] For the data nerds among you, here's the chart of the index before and after extreme-adjustment:

My private sector index looks ..... terrible

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Private sector data confirm US slowdown Since the government isn't publishing any data, I decided to create a composite index of what time series we do have from the private sector. It is composed of the whole economy ISM and PMI indices, the University of Michigan's consumer sentiment index, the logistics managers' index, ADP job changes and Challenger job losses (inverted). The pattern is familiar--I've talked about it before. A nascent recovery through 2024 in response to rate cuts stops dead in its tracks when Trump starts his tariff follies, then rallies a little because the tariff effects are lagged, but starts declining again as tariffs (and deportations and welfare cuts and healthcare) really start to bite. This indicator suggests that, at best, the economy is somewhat worse this year than last. But if current trends continue, it will be substantially weaker over the next few months, year on year. Can Fed rate cuts help? Yes, eventually. But economies lag changes in interest rates by 12 to 18 months. Current rate cuts won't undo the damage caused by Trump's policies until late 2026.

Private sector data confirm US slowdown

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Europe drives world econ higher We now have all the PMI and ISM data for October. The GDP-weighted averages for the Big 8 manufacturing and services PMIs are shown below. The Big 8 are: the USA, the UK, the Euro zone, Japan, China, Brazil, Russia, India. Together, they make up roughly 70% of world GDP. Services rebounded sharply in October, pushing up the average of the services and manufacturing PMIs (the green line in the chart) Most of that rebound was in Europe (from 51.3 to 53.0) and in the UK (from 50.8 to 52.3). Russia also rebounded, from 47 to 51.7. While the recovery in manufacturing has been sluggish, services have been surprisingly strong. Historically, the main drivers of the business cycle have been manufacturing and construction, with services following, because of the inventory (stocks) cycle. So far, the recovery in manufacturing has been weak, but services have held up, which is interesting. This suggests that Trump's trade war is affecting manufacturing, but since tariffs haven't been set on traded services, it is not affecting services. The problem is: how long can this disconnect continue? If manufacturing goes back into recession, services will surely in the end follow. Business confidence in the Big 8 is picking up too, also driven mostly by surging business confidence in Europe. My view of the world recovery and the negative effects of the Trump tariffs has so far been too pessimistic. Perhaps, like Brexit, it will take a couple of years for the negative effects outside the USA to become apparent---they are much clearer _within_ the US. Yes, manufacturing is soggy, as the trade war has (some) effect. But services are responding in the normal way to the fall in global interest rates over the last year. So far, though the recovery has not been steep, it _is_ clear that the world economy is picking up. How sustainable that is, isn't clear. [As usual, the data come from a variety of sources, including S&P Global, the ISM, and the OECD, among others. They are my calculations for extreme-adjustment and the GDP-weighted indices]

Europe drives world econ higher

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Extending PMIs back in time For many countries, the PMI indicator is very useful. They are released on the first few days of the months for the previous month, and they give a very good idea of the business cycle in each country. For some countries, I have PMI data going back 25 years, for others just 10, or less, either because the people who compile the PMI indicators (S&P Global) haven't been doing it for longer than that, or because I just don't have the data (you have to be a subscriber to get back data). But if you want to analyse economic cycles, it helps a lot to have a long run of data. What you can do is use other business surveys to estimate back data for the PMIs. The chart below shows business confidence for Austria compared with the PMI data. You can see the close correlation. Here's a similar comparison for Turkey, where the business confidence time series goes back to 1987, but the PMI (my data) only goes back to 2012. I'm working on similar analyses for other countries, which will allow me to include a few other countries in my small-country world PMI ("Small 11", which will soon expand to the "Small 14") Incidentally, the charts show that Austria's economy is falling more slowly (remember, the PMI/Business confidence surveys lead), pointing towards an upturn in Europe later this year, while Turkey's economy is slipping into recession after their Central Bank raised rates dramatically _after_ the president was re-elected. (He wouldn't permit it before.) Interest rates in Turkey are far from peaking.

Extending PMIs back in time

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US economy soggy The government has stopped publishing economic indicators, because of the shut-down, though no doubt it suits them as the data are probably less than scintillating. So we have data from non-government analysts, including the Institute of Supply Management (ISM) and S&P Global (PMI). To increase the signal-to-noise ratio, I extreme-adjust each time series (this removes or attenuates large up or down "spikes"). In addition, if you have two statistically independent time series, the average will have smaller month-to-month fluctuations than either individually. In the chart below, the dotted red line shows the extreme-adjusted PMI series for manufacturing, the dotted blue line the extreme-adjusted ISM series for manufacturing, and the thick green line the average of these two series. Normally, the PMI and the ISM move more or less in sync. Over the last few months, they haven't, with the PMI rising while the ISM is flat. I don't know what's going on here, but the ISM has been going for many decades, so it has somewhat more credibility. For now, I'll stick with the average, which is just above the 50% recession line, but not by very much. In other words, a sluggish economy. And one, which without spending on AI, would be slumping.

US economy soggy

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Europe's weak recovery S&P Global's PMI for Euro-zone manufacturing looks as if it is still in an uptrend, and it is toying with the 50% recession line. But it's very far from a boom. Yes, the PMI is up from its low of 43 in 2023. 43, by the way, is consistent with a deep recession. But it's been flat for the last couple of months. The European Central Bank (ECB) has made it clear it's not going to act to fend off a slowdown or recession caused by Trump's trade war--a mistake in my opinion. For now, I'd say the European economy is troughing, i.e., diffusion indices like the PMI are at 50%, meaning there are more respondents with improving sales/production/employment than there are where those are falling. The recovery has prolly begun, but don't go looking for a robust upswing. The ECB may well have to go back to cutting rates again. Trump's swingeing tariffs on China are leading to China's exporters looking for new markets, with the effect that China's deflation is being exported to Europe. Inflation is not going to be Europe's problem over the next 12 months; growth is.

Europe's weak recovery

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Russia continues to slump Now is not the time to let Russia off the hook. Its economy continues to slump. Growth is nugatory, business confidence sliding and the PMI is still trending down. GDP up 0.4% year-on-year, _including_ spending on the war with Ukraine.

Russia continues to slump

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Australia starts to slide back into recession This is a chart of S&P Global's Australian manufacturing PMI. This kind of index is a diffusion index, i.e., it measures the percentage rising over the previous month. At 50%, half are rising and half falling, which I call the "recession line". The PMI has just dipped below 50%, on its way down. The services PMI (October data not yet released) is still above 50, but it has been trending down. The unemployment rate recently spiked up. And the Reserve Bank of Australia is paralysed with terror about a slight rise in underlying inflation and won't cut rates. By the time they do, it will be too late to prevent recession.

Australia starts to slide back into recession

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