Manufacturing and Services PMIs Break Little ‘News’

Of all the confounding things investors have to sift through, economic data might take the cake. Data are abundant and promise to reveal all about the state of play—supply, demand, trends, sales, growth, all of which ultimately drive the earnings that stocks give us a share in. But they are also variable, frequently contradictory and hard to parse. So here is a friendly tip: When new data come out, ask yourself, “Did I learn anything new from this?” If not, then for stocks, the news probably matters precious little.

To illustrate this, let us turn to S&P Global’s batch of flash purchasing managers’ indexes (PMIs) for September. PMIs offer a timely pencil sketch of economic conditions in a given month. They are surveys, so they don’t tell you whether a sector or country grew. But they do tell you the percentage of businesses reporting increased activity, and they separate services and manufacturing. Readings over 50 mean the majority of services or manufacturing business grew, which roughly corresponds to growth. The further above 50 a reading is, the more widespread growth is. The further below 50, the more widespread contraction is. So readings well into the 50s tend to make folks happy, while those deep in the 40s inspire gloom.

With that in mind, here are September’s readings—and August’s for at least some context.

Exhibit 1: PMI-o-Rama!

Source: FactSet, as of 9/24/2024. Final August and Flash September readings.

All in all, a mixed bag, with manufacturing mostly shrinking and services mostly growing. But what did we actually learn? What is new? Turns out, not much. Manufacturing’s contractions deepened in the US, eurozone and Germany, but none of these represent a break with the trend. Germany’s manufacturing PMI downturn began in July 2022. That has a heavy influence on eurozone manufacturing, which also fell below 50 then. France’s streak started in February 2023. US manufacturing spent most of 2023 sub-50, bounced a bit in early 2024, and started shrinking again this July. The UK’s expansion, meanwhile, is a nascent trend that started in May. So all around, very little new news, no material changes in direction, just confirmation of long-running manufacturing trends.

The same goes for services, except here, the trends are growthy. US services’ expansion started in February 2023. The UK’s started last November and followed a brief dip. Germany’s started in March, and the eurozone’s one month before that. The only change comes in France, with a modest contraction after August’s sharp acceleration from a flat July. But in context, this isn’t a shock. August, after all, is when Paris hosted the Olympics—a two-week tourism boom. September is simply the natural cooling-off and return to normal after the festivities. It would be odd to match August’s breakneck pace once the athletes, spectators and glitterati left town.

So in short, we have long-running trends of weak manufacturing and growing services in the western world. Trends that are very, very old news to global stocks, which are back at new highs and rising after this summer’s pullback. There is some regional dispersion on this front, with US and German stocks hitting fresh highs last week while the UK and France are still catching up.

Markets move most on the gap between reality and expectations—basically, surprise. Economic data don’t predict stocks, but where surprises happen, they can indicate a gap between sentiment and reality. Even the dreary manufacturing PMIs don’t fit that bill, and when expectations are as low for the western world’s factories as they are these days, even objectively bad results can be fine for stocks.