The market was clearly thrilled with the +163K non-farm payroll (NFP) number on Friday morning. Equity markets were up worldwide, as were most commodities. The NFP number was much better than the consensus estimate of +100K, although the estimate of +100K was probably understated given the strong ADP employment change report released on Thursday. In addition, the prior month's NFP was revised lower by 16K, which reduced the net amount of the NFP surprise. Still, to be fair to the bulls, the NFP number was significantly stronger than expected. So, what was the bad news?
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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.
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