Global Manufacturing Stalls at Year's End

Written by Sandy Williams

About half of the nations surveyed by J.P Morgan and IHS Markit ended the year with manufacturing PMIs in contraction, with conditions especially poor in the Eurozone. The J.P. Morgan Global Manufacturing PMI fell to 50.1 last month from 50.3 in November indicating business conditions remained weak at the end of 2019.

The intermediate and investment goods sectors continued to deteriorate as output and new orders weakened. The consumer goods sector bolstered the PMI with expansion in both orders and production.

“Global manufacturing remained lackluster at the end of 2019,” said J.P. Morgan. “Growth of production and new orders were both marginal, as weak international trade flows stymied hopes of a stronger recovery from the mid-year downturn in the sector. Subdued business confidence led to cutbacks in staffing, purchasing and inventory holdings.”

“The trend in new export orders will need to stage a revival if the upturn is to gather pace at the start of the new decade,” commented Olya Borichevska of Global Economic Research at J.P. Morgan.

The IHS Markit Eurozone Manufacturing PMI dipped 0.3 points to 46.3 in December for its 11th sequential month below the 50 no-change mark. The PMI averaged 46.4 for the quarter, near a seven-year low. Production fell 1.5 percent in the fourth quarter.

“Although firms grew somewhat more optimistic about the year ahead, a return to growth remains a long way off given that new order inflows continued to fall at one of the fastest rates seen over the past seven years,” commented IHS Markit Chief Business Economist Chris Williamson. “Firms sought to reduce inventory levels and cut headcounts as a result, focusing on slashing capacity and lowering costs. Such cost cutting was again also evident in further steep falls in demand for machinery, equipment and production-line inputs.”

Consumer buying was the only thing keeping the economy out of recession, said Williamson. “The ability of the wider economy to avoid sliding into a downturn in the face of such a steep manufacturing contraction remains a key challenge for the eurozone as we head into 2020.”

The Caixin China General Manufacturing PMI remained in expansion territory, although slipping to 51.5 from 51.8 the previous month. New orders continued to grow, but at a slower rate, and exports increased only slightly. Purchasing activity and inventories expanded in anticipation of improving demand and production. Sentiment was generally positive, but weaker than the historical trend.

“China’s manufacturing economy continued to stabilize in December, although the expansion in demand was not as strong as the previous two months,” said Dr. Zhengsheng Zhong, director of Macroeconomic Analysis at CEBM Group, commenting on the China General Manufacturing PMI data. “Positive changes included improved business confidence and strengthened willingness to increase production and inventories, which are beneficial to the job market. Subdued business confidence was a major factor behind the economic slowdown this year. As the phase one trade deal between China and the U.S. has sent out positive signals, there is room for a recovery in business confidence, which should be able to help stabilize the economy.”

Business conditions contracted in Russia despite reaching a four-month PMI high of 47.6. Contraction of new orders and muted client demand, both domestically and abroad, resulted in lower output in December. Backlogs diminished, which was reflected by a decline in employment numbers. Reduction of pre- and post-production inventory levels was noted. Business confidence was muted in December.

In North America, both Canada and Mexico saw PMI declines due to weaker demand, while the U.S. saw a solid rise in new business and production.

Manufacturers in Mexico saw manufacturing indices go from bad to worse in December as contraction accelerated in new orders, exports and input buying. The PMI dropped to 47.1 in December for the steepest decline since the IHS Markit survey began in April 2011. A challenging economy, weak domestic demand and an unfavorable trade climate were blamed for the continued deterioration of business conditions.

“With rates of contraction in factory orders and output reaching new records, goods producers continued to trim headcounts and input buying at historically steep rates,” said IHS Markit Principal Economist Pollyanna De Lima. “So far, it’s difficult to see a light at the end of the tunnel and any meaningful rebound in 2020. In fact, businesses are at their least optimistic towards growth prospects in the series’ history, with many concerned about lingering uncertainty, a lack of investments and ongoing troubles in the automotive sector.”

Canadian manufacturers noted subdued demand from the automotive and energy sectors in December. The PMI fell to 50.4 from 51.4 as firms expressed difficulty getting new work from the U.S. Production increased only marginally and discounts were reportedly offered to stimulate demand. Canadian firms continued to struggle with supply chain pressure as shipments were delayed due to rail strikes and a paucity of alternative carriers. Delays led to depletion of input inventories at factories.

“It appears that manufacturers are braced for a lack of new work to replace completed projects in the New Year, with business optimism now at its lowest for almost four years and job creation moving closer to stagnation in the latest survey period,” commented Tim Moore, economics associate director at IHS Markit.

The IHS Markit U.S. Manufacturing PMI posted 52.4 in December, down slightly from 52.6 in November. New orders grew at the second strongest rate since April due to new clients and export orders. The increase in production caused capacity constraints and backlogs as well as spurring the second-fastest growth in employment since May.

“The U.S. manufacturing sector continued to recover from the soft patch seen in the summer, ending 2019 with its best quarter since the early months of 2019,” commented Williamson at IHS Markit. “The overall rate of expansion nevertheless faltered somewhat in December and remains well below that seen this time last year, suggesting producers are starting 2020 on a softer footing than they had enjoyed heading into 2019.

“Business sentiment about the outlook remains especially subdued compared to a year ago, reflecting ongoing worries about geopolitics and trade wars, especially the impact of tariffs, as well as fears that political and economic uncertainty surrounding the 2020 elections could dampen demand. The impact of tariffs was clearly evident via higher prices, while the relatively subdued level of business confidence manifested itself in a pull-back in hiring, hinting at risk aversion and cost-cutting.”  

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