Global PMIs and Fed Policy: they're linked

Monday, August 1, 2011

Today a host of global purchasing managers indices (PMIs) reiterated that the global economy is slowing....quickly.

Within 24 hours, China, the US, and the euro area all reported July PMIs falling toward the feared 50 (below which the manufacturing industry is contracting) - 50.7, 50.9, and 50.4, respectively. The UK PMI fell below 50 to 49.1 in July.

I would posit (and I believe that others have, too, like Edward Hugh) that this is directly related to Fed policy, specifically that of quantitative easing (QE).

The chart above illustrates the stated PMIs alongside the dates of a shift in the Federal Reserve's QE policy. The shorter bars indicate those dates when the Fed ended QE and announced that it would reinvest maturing proceeds. On the other hand, the full bars illustrate the outset of QE.

Falling PMIs correlate with the end of QE. New QE correlates with a rebound in global PMIs. Given this correlation and the latest GDP release, I expect that talk of QE anew to surface.

Rebecca Wilder


rjs August 1, 2011 at 4:12 PM  

ok, rebecca, i can see the correlation...but can you explain a mechanism that would cause this?

Rebecca August 1, 2011 at 4:47 PM  

Hey rj,

Well between the US and China it's pretty simple: lax monetary policy in the US transmits directly to a managed currency regime (anything that's pegged or quasi-pegged to the USD).

For Europe, it's direct via any effect that QE has on the US market (the stimulus brings import demand, which then passes through to Germany exports). Or it's the indirect route via Asia. US policy stimulates Asia, which then demands goods from Germany and Europe.

Either way, I think that there's a good case to be made that the printer of the world's reserve currency creates global liquidity and stimulus.


Marcus Nunes August 1, 2011 at 11:02 PM  

There were some problems with the indicative bars on the graph.

Patrick Van Brusselen August 2, 2011 at 5:15 AM  

Hello Rebecca,
I would second the view of commenter RJS: correlation does not mean causation. There are probably a large number of avenues for international spillovers, contagion and linkages at play in the PMI indicators, of which the Fed's QE. However, Prof Hamilton (Econbrowser) often shows and explains in his blog posts that if QE leads to increases in base money, ie higher excess bank reserves at the Fed, it generates only very little money or credit creation.

Rebecca August 2, 2011 at 5:48 AM  


My bars are correct, as dictated by the NY Fed. Notice I included the link

The august and June dates are the dates when the Fed announced the reinvestment of their maturing securities. That is what I referred to.


Patrick Van Brusselen August 2, 2011 at 8:19 AM  

Rebecca, further on the subject, the IMF has a new WP out (WP 11/183) out that discusses these issues, and finds no conclusive evidence of a correlation from QE to financial pereformance in the rest of the world.

Rebecca August 2, 2011 at 9:15 AM  

Hi Patrick,

I would agree, that causation is not the same as correlation (or the other way around). But the liquidity channel via the global economy is bound to be quite strong when we're talking about pegged (or quasi pegged) currencies.

To be sure, I would have a difficult time arguing that the domestic effects have been too very strong. There's no demand for credit and the labor market stinks. So why should the base be getting out into the economy?

However the PMIs are big multinational surveys - so it would make sense that flush global liquidity, partially brought on by the Fed, would increase the outlook and confidence by these firms.


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