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Manufacturing's Lack of Confidence

NEW YORK (TheStreet) -- So far three regional manufacturing purchasing managers' indices (PMIs) have been flash estimated for January: Euro area, U.S., and China. These three also represent the largest global economic weights by many measures, including a purchasing power parity standard.

China's PMI fell 0.9, to 49.6, where any level below 50 indicates contraction. But this PMI drop by itself is not extraordinary, as during all of 2012 and 2013, the China PMI average was also this same contractionary 49.6 (and with a monthly typical deviation of a larger 1.3).

Though less noticed, the U.S. had a relatively larger PMI drop of 1.3, to 53.7. This above 50 reading indicates there was still some expansion, and over 2012 and 2013 the U.S. PMI average was 53.3 (but with a similar monthly typical deviation as the 1.3 drop). So the U.S. has fared better than China over the past two years, during which time China has seen far greater volatility in its PMI versus this recent January reading.

We can look at the multivariate analysis of other regional PMIs in connection to the Euro area, the U.S., and China. In doing so, we see that Brazil tracks close to the U.S. and China in combination, and to a lesser degree to either taken in isolation. See the dark dotted line on the chart below, which shows an estimated drop in Brazil's PMI for January.

On the chart below we simply average the monthly PMIs for the U.S. and China, and show that Brazil is as closely connected to the U.S. as it is to the other emerging market of China. There is a weak connection of Russia's PMI to the U.S. and China, so we show that as well in light dotted lines.

The Euro area PMI is nearly two-thirds more volatile as either the series in the U.S. or China. In addition, none of the three are correlated with one another. As a result, econometric analysis tends to have many regional PMIs fit better to the Euro area PMI. For example, India's PMI tends to have a negative relationship with the Euro area PMI, as shown with a dashed line in the next chart.

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