Global Manufacturing Nearly Stagnant in January

Written by Sandy Williams

Global manufacturing is approaching the stagnation point, says a new survey by J.P. Morgan and IHS Markit. The J.P. Morgan Global Manufacturing PMI fell for the ninth month in January to register 50.7, its lowest reading since August 2016. Trade tension originating with the U.S. was a common theme throughout the IHS Markit PMI reports in January.

The slowdown in China led the PMI decline along with downturns in the Eurozone and Japan, all falling to multi-year lows. The U.S. defied the slowing trend, gaining 1.1 points in January to register 54.9. Removing U.S. results from the global calculation would place the headline PMI at 50.0.

The consumer goods industry performed the best despite slowing to a four-month low. Intermediate goods fell to 50.0 and investment goods edged into contraction.

New orders stalled in January causing an easing of manufacturing production. New export orders were down for the fifth consecutive month and at the lowest rate since May 2016.

Input inflation eased as the new year took hold and output charges rose at a slightly quicker pace.

Manufacturers in China experienced an uptick in new export orders, rebounding from the U.S./China tariff war. The Caixin China General Manufacturing PMI, however, failed to build upon December’s increase, posting a 48.3 in January, down from 49.7 the previous month.

Commenting on the PMI, Dr. Zhengsheng Zhong, Director of Macroeconomic Analysis at CEBM Group said: “While domestic manufacturing demand shrank, external demand turned positive and became a bright spot amid positive progress in Sino-U.S. trade talks. As companies were more willing to reduce their inventories, their output declined, indicating notable downward pressure on China’s economy. China is likely to launch more fiscal and monetary measures and speed up their implementation. Yet the stance of stabilizing leverage and strict regulation hasn’t changed, which means the weakening trend of China’s economy will continue.”

The South Korean manufacturing PMI fell sharply to 48.3 in January from 49.8 in December. New export orders dropped for the sixth month in a row. Joe Hayes, economist at IHS Markit, called falling export demand a “worrying indicator for global economic growth.” Weak domestic demand and an unfavorable international market led to production and employment cuts as manufacturers braced for difficult business conditions in the near-term.

“In the current climate, President Moon’s economic reforms and ambitious stimulus policies will be acting to offset business cycle effects as opposed to complementing them,” said Hayes.

Deteriorating international demand played a huge part in the falling PMI in Japan. The Nikkei Japan Manufacturing PMI dropped sharply to 50.3 in January from 52.6 in December. A consumption tax expected later this year, along with Sino-U.S. trade tension, will further challenge business conditions that are frail both at home and abroad for manufacturers.

Manufacturing conditions in the Eurozone continued their six-month deterioration. The PMI fell to 50.5 from 51.4 in December. New orders fell sharply domestically and for new exports business. Prices rose for inputs and output charges, but at a slower rate.

“The January PMI adds to the likelihood that the manufacturing sector is in recession and will act as a drag on the economy in the first quarter,” said IHS Markit Chief Business Economist Chris Williamson. He noted that the European auto sector is struggling with new emissions regulations, and protests were dampening demand in France.

“However, there appears to be a more deep-rooted malaise setting in, which reflects widespread concerns about the destabilizing effect of political uncertainty and the damage to exports from rising trade protectionism,” said Williamson.

Business conditions in Russia weakened as manufacturers expressed concerned over an increase in the value-added-tax (VAT). Input charges rose and were passed on to clients in output prices. Production growth eased, which helped reduce backlogs but also decreased input buying. Domestic demand strengthened, but new export orders declined for the first time since July 2018. The IHS Markit Russia Manufacturing PMI eased to 50.9 in January from 51.7 in December.

Turning to North America, Canada reported output and new business slowing in January. The PMI eased to 53.0 in January from 53.6 the prior month. New orders, domestically and abroad, weakened as global trade tensions spurred cautious spending by clients. Backlogs increased for the fourth month, a trend blamed on capacity pressure and longer lead times from suppliers. Employment growth was strong as companies anticipated expansions and a rebound in demand for 2019.

“There were some signs that manufacturers expect the slowdown in manufacturing conditions to prove temporary, as signaled by the robust rate of job creation reported in January,” said Christian Buhagiar, President and CEO at Supply Chain Management Association. “Optimism regarding the business outlook also improved at the start of 2019, with output growth projections now the strongest since last August. Manufacturers attributed their positive expectations to planned expansions of production cap.”

The IHS Markit Mexico Manufacturing PMI rose to 50.9 in January, pulling up from contraction at 49.7 in December. New orders at home picked up, although new export business was flat. Production fell only slightly, and companies made progress on backlogs. Input costs continued to rise but at a slower pace, driven primarily by currency weakness and fuel shortages. Fuel shortages, security concerns and economic uncertainty weighed on business confidence, dropping the annual outlook for production to a record low.

The United States saw a steep increase in domestic demand that offset a decline in export growth. The IHS Markit U.S. PMI registered 54.9, up from 53.8 in December. Production rose at its fastest rate since September in response to demand and efforts to clear backlogs. Employment expanded at a solid rate in January. Input prices remained elevated due to tariffs on steel and aluminum and greater demand for other raw materials. Increased client demand allowed firms to raise their factory gate charges at a faster rate in January.

“January saw U.S. manufacturers start the year with renewed vigor,” said Williamson. “Production rose at a markedly increased rate, commensurate with the factory sector contributing to robust economic growth of approximately 2.5 percent in the first quarter if such momentum can be sustained in coming months”

“The upturn in business activity in January helped lift confidence in the outlook, though many companies clearly remain concerned about the impact of trade wars and rising protectionism,” added Williamson.

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