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This indicator suggests the global economic recovery is even stronger than we thought

Michael Ochs Archives/Getty Images

2017 was a strong year for the global manufacturing sector, and if the lead indicators are any guide, 2018 could be even better.

The latest JP Morgan-IHS Markit Global Manufacturing PMI rose to 54.5 in December, leaving it near the highest level in nearly seven years.

Source: IHS Markit

This PMI measures changes in perceived activity levels across the global manufacturing sector from one month to the next. Anything above 50 signals that activity levels are improving while a reading below suggests they’re deteriorating.

The distance away from 50 indicates how quickly activity levels are expanding or contracting.

That means that in the final throngs of 2017, activity levels improved at the fastest pace since the recovery from the global financial crisis.

Pretty impressive, especially as this survey captures responses from over 12,000 individuals in more than 40 countries, accounting for an estimated 95% of global manufacturing output.

Activity levels have now improved in each of the past 22 months.

Like the headline index, the internals of the December report were rock solid.

IHS Markit said growth was registered across consumer, intermediate and investment goods during the month with rates of improvement accelerating in all three.

“The strongest pace of improvement was in the intermediate goods category, followed closely by investment goods, with PMI readings at eighty-two month highs in both cases,” the group said.

Source: IHS Markit

It was a similar story by geographic region with improvement seen in both developed and developing markets.

“The euro area remained the strongest performing region, with its PMI hitting a series-record high,” IHS Markit said.

“Rates of expansion improved in the US and Japan, but eased in the UK.

“PMI readings hit a three-month high in China, surged to a five-year high in India, five-month high in Russia and remained in expansion territory in Brazil.”

Adding to optimism that the strength in 2017 will continue in the months ahead, the survey’s new orders subindex — a lead indicator on activity levels in the future — bounced to 55.8 from 55.2, leaving it at the highest level since early 2011.

Like the headline PMI, a reading above 50 indicates that new orders grew from a month earlier.

Source: IHS Markit

Multi-year highs were also recorded for new export orders and order backlogs — again, two readings that suggest demand continues to strengthen.

Unsurprisingly, firms upped their hiring levels during the month to capitalise on current and expected operating conditions in the future.

Input and output prices — measures of raw materials and finished goods inflation — also increased, albeit at a slightly slower pace than one month earlier.

David Hensley, director of Global Economic Coordination at JP Morgan, says that the details of the December report bode well for the sector in the months ahead.

“Improved inflows of new business, rising backlogs of work and improved business optimism all point to this robust upswing in output growth being carried over into 2018,” he says.

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