Economy

Global PMI Contracts in May to Lowest Level Since 2012

June 6, 2019

Global manufacturing activity sank into contraction in May. The JP Morgan Global Manufacturing PMI slipped to 49.8 last month for its lowest level since October 2012. International trade concerns dampened new export orders, which fell for the ninth month in a row. Business optimism fell to a level not seen since October 2012.

Said JP Morgan and IHS Markit: “National PMI data signaled deteriorating business conditions in several major industrial regions including the Euro area, Japan, the UK, Canada, South Korea and Taiwan. PMI readings for the U.S., China and Brazil were only a few ticks above the benchmark 50.0 no-change mark. The downshift in growth in the U.S. was the main driver of the slowdown in global manufacturing, as the U.S. PMI slipped to its lowest level in almost a decade (September 2009).”

The intermediate and investment goods industries saw output and new orders fall during May while consumer goods maintained growth, although at a slower rate of expansion.

The Eurozone PMI fell to 47.7 in May, remaining in contraction for a fourth month. New orders and output declined while lead times shortened to the greatest degree since mid-2009, said IHS Markit. Conditions in Germany fell at the sharpest rate, posting a PMI of 44.3. Italy and France posted PMIs in contraction at 49.5 and 47.8. France and Spain hovered just above the no change mark while Greece, followed by the Netherlands, led the region in manufacturing expansion.

IHS Markit Chief Business Economist Chris Williamson noted the fourth successive drop in output and a steep decline in new orders. Input buying and hiring weakened as firms worried about falling demand. Forward-looking metrics point to a possible moderation of the downturn in June. “However, trade wars, slumping demand in the auto sector, Brexit and wider geopolitical uncertainty all remained commonly cited risks to the outlook, and all have the potential to derail any stabilization of the manufacturing sector,” said Williamson.

The Caixin China General Manufacturing PMI was unchanged at 50.2 in May. New orders edged higher in both the domestic and overseas markets and production was broadly stable. Trade tension between China and the U.S. is having an impact on business confidence in China, which is being addressed by “favorable reforms” and “timely adjustments to regulations and control.”

The manufacturing PMI contracted in Russia posting 49.8 in May, down from 51.8 in April. Production was essentially flat due to subdued demand. New export orders were down slightly as were employment levels. Costs were higher last month and were passed in part to clients in factory gate charges. Investment in new technology provided confidence for increased output during the next 12 months.

Canada remained in contraction for a second month with the PMI falling to 49.1 in May from 49.7 in April. Weaker demand from foreign and domestic markets led to lower rates for production and new orders. Inflation of input costs was the weakest in four years although survey panelists noted higher fuel, resin and food charges. U.S. tariffs added to cost burdens that were passed on to customers. Optimism was higher as Canadian manufacturers looked forward to better international trade conditions in the year ahead.

Manufacturing in Mexico was unchanged in May as indicated by a PMI reading of 50.0. New orders increased marginally but anecdotal comments suggested full inventories of finished goods, auto-sector weakness and subdued demand. Orders grew slightly from Central America and other foreign markets. Production inched up in May after two months of contraction. Input costs were higher, resulting in increased selling prices. Border issues and material shortages affected suppliers and lengthened delivery times. Manufacturers were optimistic about conditions for the next 12 months with planned capacity expansions and new product launches.

The IHS Markit U.S. Manufacturing PMI fell to its lowest rate since September 2009. The PMI posted at 50.5, sliding from 52.6 in April. Production rose only marginally and was attributed to working through backlogs. Weak demand and trade tensions resulted in the lowest confidence level for future growth since mid-2012. New orders fell for the first time since August 2009 as customers postponed orders due to uncertainty about the outlook. Large companies, in particular, are seeing order books contract after strong growth at the end of 2018. IHS Markit notes it is the “first such decline seen in the series’ 10-year history.”

Said Williamson, “May saw U.S. manufacturers endure the toughest month in nearly 10 years, with the headline PMI down to its lowest since the height of the global financial crisis.

“While tariffs were widely reported as having dampened demand and pushed costs higher, both producers and their suppliers often reported the need to hold selling prices lower amid lackluster demand. While this bodes well for inflation, profit margins are clearly being squeezed as a result.

“With future optimism sliding sharply lower in May, risks to near-term growth have shifted further to the downside.”