First they danced in a wild frenzy around the altar. That didn’t work. Then they tried a sacrificial offering and attempted to interpret the future from the dead creature’s intestines. That didn’t work, either. They tried reading tea leaves; then the tarot cards; and they gazed into the heavens, wondering whether the stars had the answer. And then one economist said, let’s try a different method for forecasting the economy. Let’s see what the latest set of Purchasing Managers Indices, or PMIs, from across the world have to say.

One thing is for sure: the trend is down, but, with one notable exception, they are still high by historical standards and point to robust growth.

Before we reveal what the PMIs said, just bear this in mind: a score of 50 indicates no change. Anything above 55 is good, 60 exceptional. Anything with a four in front, say, 49, indicates contraction for the particular areas the index relates to. So, if an index measuring employment falls below 50, that means there were net job losses.

The UK PMI, from CIPS/Markit fell, but from a near record high. Back in April and May this index stood at 58, the highest reading since the middle of the 1990s. In June it dipped to 57.6, and in July it was down again to 57.3. The latest reading is still impressive. As you probably know, the UK expanded at 1.1 per cent quarter on quarter in Q2. Economic forecasts for 2010 suggest this growth rate will fall sharply in Q3 and Q4, maybe even fall to zero. But if the PMI is any guide, there are no signs yet of this dip. Q3 started with a PMI score for manufacturing consistent with above average growth. The PMI for services is due out tomorrow; let’s see what that says.

But one nagging worry lingers. The index tracking new export orders fell to 50.7. When you consider the index was at 60.5 in April, that was quite a drop. If the trend continues – well, then the implication is not good.

Across the pond, the PMI for manufacturing, produced by ISM, fell to 55.5 from 56.2 the previous month, and from 60.4 just a few months ago in April. The trend is worrying, but the current level is still consistent with growth of around 4 per cent, which is really not bad at all. The index tracking employment in the manufacturing sector stood at 58.6. The US manufacturing sector now seems to be taking on staff at a healthy rate, and in time this should lead to a rise in consumer spending which should help lift other sectors.

The bad news relates to China. Yesterday it was told here how the PMI from the Chinese Federation of Labour fell from 52.1 in June to 51.2 in July. Then last night, an alternative measure, produced by HSBC/Markit was released, and this index was down to 49.4. It was the first time this index had fallen below 50 since March 2009.

China faces a serious set of challenges. Clearly manufacturing is in the doldrums. With its main export market – Europe – in such dire straits, and in any case trying to import less and export more, it is hard to see how China’s export led boom can continue at the level it has become used to. With bank loans to local governments looking decidedly iffy, China desperately needs its consumers to spend like they have never spent before. See: China’s double whammy
http://www.investmentandbusinessnews.co.uk/china/chinas-double-whammy/

And finally, we have the global PMI produced by JPMorgan/Markit. This fell from 55 in June to 54.3, the lowest reading seen this year. However, while the index is down, it remains above the historical average. The PMIs in the first half of this year had the highest average readings since the first half of 2004.

China aside, it is too early to tell whether the fall in PMI is simply the inevitable consequence of the sky high levels they reached earlier in the year, in which case there’s room for optimism; or whether the downward trend points to trouble ahead.