World economy at the half-year point

by Michael Roberts

We are at the halfway point in 2012 and it is not looking good for the world economy.  The US jobs figures for the month of June came out on Friday and only 80,000 net new jobs were created in the whole of the US.  The average increases for the last three months of 75k a month are nowhere near enough to get down a stubborn official unemployment rate of 8.2%. If you exclude the reductions in public sector employment, the private sector did little better.  Indeed, goods producing industry jobs have declined in the last three months.

Readers of this blog will know that I like to look at a range of high-frequency activity indicators to judge where the world economy is going.  First, I look at US index of the survey of corporate purchasing managers view of activity in their companies.  I have combined the manufacturing and services ISM indexes, as they are called, into one composite index.  This is what it shows for up to June 2012.

It seems that the US economy is still in the range of ‘low growth’ and not in ‘recession’ yet, but the direction is down.
There is an even more frequent (weekly) index, but less reliable, that is compiled by a research company, ECRI, which takes a number of variables to try and measure US economic activity.  The outcome for up to end-June looks like this.

Still just above recession levels – but only just.

And the US is in the best shape of the major capitalist economies, with real GDP growing at about 2% a year rate.  In Europe, most economies are either flat or contracting, the exception being northern Europe.  Japan too is crawling out of its tsunami and earthquake crisis.  If we look at purchasing managers indices for all these major economies, this is what it looks like.

On these measures, the world economy is contracting for the first time since 2009, along with Japan, China and, of course, the Eurozone.  The UK is basically flat.

There has been much talk that China is heading for a hard landing.  I have not thought so up to now (see my post, Which way for China?, 19 March 2012).  But  China’s goods producers reported an eighth successive month-on-month deterioration in operating conditions during June, as output, incoming new orders and employment continued to decrease. China’s composite PMI inched lower from 48.4 to 48.2 in June, a level indicative of a modest pace of deterioration in business conditions.

So is China going into a slump after all?  Well, I have tried to compile a forward-looking indicator for China’s economy based on an average movement of a range of key economic variables.  This is what that shows.

So contraction is under way but China is not yet in a slump.  Contraction means a slowing of economic growth from double-digits to an 8% rate or lower.  A slump means economic growth of less than 5-6% as it reached back in 2008.   The Chinese government has now reacted to this by cutting interest rates but has not opted yet for a big fiscal spending package as it did in 2009 to revive growth.  So the issue of China’s landing remains open, in my view.

One firm conclusion is that world capitalism is still unable to restore sustained economic growth some four years after the Great Recession began.  It is less clear whether it is heading back into a slump after its weak recovery from mid-2009.  But the risks are rising.