CRU: Manufacturing Hits a Soft Patch

Since total IP growth for Q1 was revised down to register a decline of 0.5 percent q/q, we have reduced our forecast for 2019 IP growth to 2.0 percent from 2.7 percent previously. The ISM manufacturing PMI in April fell to its lowest point since October 2016, and although the PMI still indicates expansion in manufacturing, the rate of growth is decelerating. The PMI result is supported by slowing momentum in the six-month moving averages for orders in key categories such as motor vehicles, machinery and equipment.

While the large inventory build during Q1 is partly responsible for the weaker orders picture, we note the trade war as a contributing factor as well. Even though increased tensions in the U.S.-China negotiations are likely to result in higher tariffs on Chinese imports, there have been two positive developments in the U.S. trade picture. First, the U.S. has now exempted Mexico and Canada from the steel and aluminum tariffs levied under Section 232, clearing the way for the USMCA trade pact to be ratified in those countries. Democrats in the U.S. House of Representatives, however, are stalling with their approval, citing a lack of protection for U.S. workers in the new agreement.

Another piece of good news is that President Trump has not issued Section 232 tariffs on vehicles and parts. Instead, the key exporters—EU, Japan and South Korea—now have until November to find a way to satisfy the president. Thus, our forecast for total vehicle production of 1.4M units this year is unchanged.

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