An easy way to track the health of the overall global economy is by analyzing the global purchasing managers index data (PMI) offered by Markit. We go one step further and compile all the data from the various countries into a diffusion index. In this way we can see the breadth of global economic activity. A positive number indicates more countries expanding than contracting, while a negative number indicates more countries contracting than expanding. Recently our 1 year diffusion index has rolled over (falling to 13, after peaking at 17 in September 2013), and this is validated by our one month and three month diffusion indexes.
When we overlay the Fed's asset purchases over the last three years, an interesting relationship emerges. The one year diffusion index lines up very well with the three month increase in the Fed's total asset purchases. With tapering already in motion, and the three month rate of change in Fed assets on a glide path to zero through the course of 2014, we suspect 2014 could see a slow deterioration in the breadth of global activity.
