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MarketWatch First Take

Despite slowdown, recession not inevitable

WASHINGTON (MarketWatch) -- There's little to cheer about in today's headlines about the global economy. From China to Europe to Philadelphia, the news is grim.

The economy is slowing, and there's not much anyone is doing about it.

Europe is in recession. America could be heading there. And the gigantic growth machine that is China is also slowing.

All across the globe, demand for manufactured goods is falling. The problem may have its roots in Europe, but the impact is showing up elsewhere:

• In China, the preliminary HSBC manufacturing purchasing managers' index dropped to 48.1, the eight straight month of contraction. Read the news report on China's manufacturing slump.

• In Europe, the flash manufacturing PMI from Markit fell to 44.8, the lowest in three years. Read more on Europe.

• In the U.S., the flash manufacturing PMI from Markit remained in positive ground at 52.9, but the pace of the expansion in the factory sector slowed from May. Read more on the slowdown in manufacturing.

• Finally, the Philadelphia Fed said its manufacturing index plunged to negative 16.6 in June. Read our full story on the Philly Fed index.

Other economic news added to the gloom: More Americans applied for unemployment checks. Sales of existing homes dipped.

The headlines were bad, but none of the new reports was a game-changer; they are simply more of the same. Our view of the economy on Thursday is roughly the same as it was on Wednesday.

For the U.S., the most worrisome news on Thursday came from the Philly Fed index. Although the Philly Fed district's output is relatively small, economists and investors have given this index heightened importance because it's been thought to be the best predictor of the Institute for Supply Management index, which in turn is a good predictor of national economic growth.

But the Philly Fed is volatile, which is another way of saying that it sometimes gives false signals. It did last summer, when it plunged to negative 22.7 as the debt-ceiling crisis came to a head and S&P downgraded the American government's debt rating.

But the national ISM purchasing managers index held up last summer, and the economy continued to expand, despite the alarm bells then ringing in Philly.

Philly's bell is ringing again. But now we have the additional information provided by the newly introduced Markit PMI, which remained in expansion mode in June. In time, the Markit PMI may turn out to be a better predictor of the ISM (and the overall economy) than the Philly Fed index ever was.

Which brings us to Thursday's outlier data point: The index of leading indicators rose 0.3% in May. Read our report on the low risk of downturn. The economists who put the LEI together said that, while they see the economy slowing, they don't see any indication of an outright contraction any time soon.

The economy is certainly not booming, but neither is a recession inevitable.

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