Global Manufacturing PMI Points to Worldwide Recession

No country's economy is an island.  Even the US economy, which accounts for 28% of global GDP, is heavily dependent on other countries.  Foreign sales as a percentage of total sales for S&P 500 companies are approaching 50%.  As a result, any global recession would eventually affect the US.

When forecasting recessions or market cycles in the US, we tend to focus on US economic data, but it might be more meaningful to look at global economic data. Think of the global economy as an extremely large passenger ship - let's call it the Titanic.  It is much easier to forecast the future position of a large ship (the global economy) than a small boat (the local economy), because the large ship is not able to make sudden changes in direction and it takes much longer to change its momentum.  The same is true about the global economy.

JP Morgan Global Manufacturing PMI

It would be impractical to look at every economic statistic in every country, so we will focus on the manufacturing purchasing managers index series.  According to Markit Economics, a leading specialist in business surveys and economic indices,

"The PMIs have become the most closely-watched business surveys in the world, favored by central banks, financial markets and business decision makers for their ability to provide up-to-date, accurate and often unique monthly indicators of economic trends."

JP Morgan and Markit developed a composite index called the JP Morgan Global Manufacturing PMI.  Please use the above link to download the latest free monthly report on the PMI Index in PDF format.  The JP Morgan Global Manufacturing PMI index is a GDP weighted composite of each country's latest monthly PMI value.

PMI values below 50 signify contraction and PMI values above 50 indicate expansion. The latest Global PMI reading was 48.4, the lowest level since June 2009 - when the world was emerging from the Great Recession.  The latest report further states that "the PMI remained below the neutral 50.0 mark for the second straight month, to signal back-to back contractions for the first time since mid-2009."

In addition to calculating the Global PMI, a separate index value is calculated for output, new orders, and for input prices.  Not only are the Global PMI, output, and new order indices all below 50.0, but they are all contracting at a faster rate.  Input prices are also falling at a faster rate.  In other words, not only is the trend already negative, but the rate of decline is still increasing.  Given the precarious global economic environment, this is particularly disconcerting.

Other Reasons for Concern

Here is a relevant quote from a recent article written by Thomas H. Kee, Jr. titled "Rally may be running out of fuel."

"Since July of last year, SPY has seen a 62% drop in short-interest and QQQ 59%. QQQ short-interest is now its lowest since October 2000, and SPY short-interest is lower than it has been since October 2007. Ammunition for charging this market higher seems to be running out. This is even more highlighted by the 45% and 30% plunge in QQQ and SPY short-interest in the last six weeks alone.”

You might be tempted to interpret the above information as bullish; fewer investors are selling the SPY and QQQ ETFs short.  However, most sentiment data are contrary indicators.  When investors become extremely bullish or risk-seeking, the market is typically nearing a top.

A similar sentiment indicator is Schaeffer's Gamma Weighted SOIR on the SPY ETF.  Don't be intimidated by the name.  The Gamma Weighted SOIR is simply a ratio of put open interest divided by call open interest (in the SPY), which assigns more weight to at-the-money options.

The SOIR was 0.90 yesterday.  Levels below 1.0 often occur at short-term market tops.  Again, this is a contrary indicator.  When investors are unusually bullish and purchase more calls than puts (downside protection), this signifies an unusual level of complacency, which often leads to bearish reversals.  The VIX is currently very low, even lower than most measures of statistical or historical volatility.  It is very unusual to see implied volatility below statistical volatility when volatility is below the norm.  In the recent past, this has also led to significant market declines and sharp increases in volatility.

Divergence between Dow Transports and Dow Industrials

Mark Hulbert has also identified a divergence between the Dow Jones Transportation Average and the Dow Jones Industrial Average in his recent article titled "Meaning of weakness in Dow transports." According to Hulbert,

 "There appears to be at least some objective support for the notion that weakness in the transportation sector can presage weakness in the overall economy.

Consider a study conducted by the Bureau of Transportation Statistics in the U.S. Department of Transportation, which analyzed the bureau’s Freight Transportation Services Index. The researchers found that their index is indeed a useful leading indicator — turning down an average of four to five months prior to slowdowns in the economy."


The market is overbought and investors are complacent.  The global economy is weak and getting weaker.  In addition, we are approaching the fiscal cliff with no bipartisan solutions.  The leaders in Europe continue to kick the debt-crisis can down the road, but they are on a dead-end street.  Even the emerging economies are slowing. In short, the Titanic is approaching a massive iceberg and it is too late to change course - and there are not enough lifeboats on board


Your comments, feedback, and questions are always welcome and appreciated.  Please use the comment section at the bottom of this page or send me an email.

Do you have any questions about the material?  What topics would you like to see in the future?


If you found the information on www.TraderEdge.Net helpful, please pass along the link to your friends and colleagues or share the link with your social network.

The "Share / Save" button below contains links to all major social networks.  If you do not see your social network listed, use the down-arrow to access the entire list of social networking sites.

Thank you for your support.

Brian Johnson

Copyright 2012 - Trading Insights, LLC - All Rights Reserved.







About Brian Johnson

I have been an investment professional for over 30 years. I worked as a fixed income portfolio manager, personally managing over $13 billion in assets for institutional clients. I was also the President of a financial consulting and software development firm, developing artificial intelligence based forecasting and risk management systems for institutional investment managers. I am now a full-time proprietary trader in options, futures, stocks, and ETFs using both algorithmic and discretionary trading strategies. In addition to my professional investment experience, I designed and taught courses in financial derivatives for both MBA and undergraduate business programs on a part-time basis for a number of years. I have also written four books on options and derivative strategies.
This entry was posted in Economic Indicators, Market Commentary, Market Sentiment, Market Timing and tagged , , , , , , , , , , . Bookmark the permalink.

2 Responses to Global Manufacturing PMI Points to Worldwide Recession

  1. Carl says:

    Hi Brian,

    It’s nice to discover your blog. I’m finally sitting down to start coding economic indicators like PMI – in Amibroker – so I can backtest/use as signals. I see from an earlier post that you are using Amibroker. Have you coded any econ indicators? I’m about to go down the path of using loops instead of arrays/time frames. Let me know if you have another idea.


    • Carl,

      I have used some economic data in AMIBroker, including the ECRI Weekly Leading Indicator (WLI) series, which I upload in CSV format. I use CSI for my data source and they also supply a number of economic series that can be used to create strategies in AMIBroker.

      Good luck with the loops in AMI. Coding with arrays is very fast and efficient in AMI, but there are some algorithms that require loops. Once you get the hang of using loops in AMI, it will open up even more of the platform’s capabilities.

      Keep us posted on your progress with AMI.

      Thanks again for your interest in TraderEdge.Net.


      Brian Johnson

Leave a Reply

Your email address will not be published. Required fields are marked *