UK PMI collapses. Term spread moves toward inversion.
From yesterday’s FT:
A special edition of the purchasing managers’ index (PMI) – a well-regarded survey of activity produced by research group Markit – has been published to provide a picture of how the UK economy has fared after the referendum. The picture is not pretty.
The PMI survey for Britain’s powerhouse services sector – which accounts for nearly 80 per cent of the economy – has dropped to a seven year low of 47.4 for July from 52.3 at the June survey. Any reading below 50 indicates contraction. The outcome was far lower than economists’ forecast of a reading of 48.8.
Here’s the relevant graph.
The yield curve has not yet inverted.
Note that, as discussed in this post, most of the flattening of the yield curve has been due to a falling long yield, rather than a rising short rate.
While the yield curve does not appear to be a reliable indicator of recessions in the UK (as defined by ECRI), there is a statistically significant correlation between yield curve and (real time measures of) GDP growth over the subsequent 4 quarters (see Chinn and Kucko, 2015).
Δyt+4 = 1.43 + 0.47spreadt + ut+4
Adj-R2 = 0.14, N = 104, 1987Q3-2013Q2. bold denotes significant at the 5% msl, using HAC robust standard errors.
A drop in the spread of about 0.5 (that’s the drop in the ten year since the Brexit vote) implies about a 0.25 deceleration in GDP growth.