NAM: Global manufacturing economic update

There were signs of progress in the global economy in October, but manufacturers continued to face headwinds. On the positive side, the J.P. Morgan Global Manufacturing PMI increased from 50.7 in September to 51.4 in October, its highest level since March. This provided a little encouragement after falling to a two-year low in August and September. In particular, this report reflected better data in the United States, Japan and the United Kingdom. Despite this progress, many of the underlying economic challenges have not changed much over the past few months. Along those lines, there were five countries in the top 10 markets for U.S.-manufactured goods that remain mired in contraction territory. These include Brazil, Canada, China, Hong Kong and South Korea.

Brazil’s manufacturing activity deteriorated at its fastest pace since March 2009, while China and Hong Kong eased in their rates of decline for the month. Still, Chinese economic growth has decelerated significantly, including industrial production, with President Xi Jinping reducing China’s real GDP target to 6.5 percent, down from 7.0 percent earlier in the year. Indeed, slowing activity in China has continued to prompt financial markets around the world to worry more about global economic growth. Those problems are most evident in the emerging markets, where manufacturing activity has now contracted for seven straight months. Closer to home, manufacturers in Canada continue to struggle on the drop in crude oil prices, with that nation’s struggles playing a significant role in recent elections, which saw Justin Trudeau capture the majority of votes against incumbent Prime Minister Stephen Harper.

In contrast to other regions, Europe has been trending in the right direction. The Markit Eurozone Manufacturing PMI increased slightly from 52.0 to 52.3, and in general, there has been considerable progress since the sector was essentially stagnant in November 2014 (50.1). There were modest expansions in October for manufacturing new orders, output and exports. The United Kingdom made the most progress in October, with its PMI increasing to the highest level since June 2014. Meanwhile, Greece continued to contract, even as it notched its best reading since May. We will get provisional real GDP figures on November 13 for the third quarter, which are expected to be around 1.7 percent year-over-year. This would be an improvement from second-quarter growth of 1.5 percent on a year-over-year basis.

Deflation has been a major concern for the European Central Bank the year, spurring suggestions of increased quantitative easing moves soon. Indeed, there has been talk of more monetary stimulus by the end of this year. When you combine that news with the growing consensus that the Federal Reserve will begin to raise short-term interest rates at its December meeting, it is not hard to see why the U.S. dollar continues to strengthen. The dollar has appreciated more than 24 percent since the end of June 2014, making it more difficult for manufacturers in the United States to grow their exports. Weaknesses abroad are another factor challenging international trade right now.

According to updated data from TradeStats Express through the third quarter, manufactured goods exports have fallen 5.1 percent year-to-date in 2015 relative to the same time period in 2014. This trend extends to the top four markets for U.S.-manufactured goods: Canada (down 8.6 percent), Mexico (down 0.3 percent), China (down 0.4 percent) and Japan (down 3.6 percent). In addition, exports to Asia, Europe and South America were down 1.9 percent, 3.0 percent and 14.7 percent, respectively, year-to-date. Nonetheless, the U.S. trade deficit narrowed in September on an increase in goods exports and a decrease in goods imports. In addition, the petroleum trade deficit fell to $5.6 billion, with petroleum imports at their lowest level since May 2004.

One month after announcing the conclusion of the Trans-Pacific Partnership (TPP) agreement, the United States released the text of the TPP and moved forward toward signing. Some progress was made during the 11th round of Transatlantic Trade and Investment Partnership (TTIP) talks between the United States and the European Union (EU). The House approved a reauthorization of the U.S. Export-Import (Ex-Im) Bank as part of a highway bill, which is now headed to conference. Customs legislation remains under consideration, and negotiations continue on environmental and information technology goods.

Chad Moutray

Chief Economist

National Association of Manufacturers

Associated Industries of Missouri is the sole official designated partner of the National Association of Manufacturers in Missouri.