Global Manufacturing Hits A 22 Month Low

Global Manufacturing - Markit PMI Matches Highest Estimate

The Markit global manufacturing PMI beat estimates and increased from August. The ISM PMI did the reverse. Prior to this set of reports, the ISM reports have been wildly optimistic. But the Markit ones have shown weakness.

Let’s review the Markit report first. The September flash Markit reading suggested manufacturing was strong and service sector growth was weakening. We’ll need to wait until Wednesday to see if service sector growth rebounded in the second half of September.

The Markit PMI was 55.6 which beat estimates for 54.5 and August’s reading of 54.7. It matched the high end of the consensus range. It was unchanged from the mid-month flash reading.

This was a 4 month high. Output was the highest this year. The strength was in the domestic market while tariffs caused export orders to be flat. Tariff concerns caused the business confidence outlook to fall to the lowest point in a year.

The tariff worries could be consoled by the next report because America and Canada struck a trade deal as I will detail in my next article.

This PMI shows there are some capacity constraints because backlogs were built at the fastest rate in exactly 3 years. Input costs also rose quickly and there were component shortages.

2/3rds of the increase in input costs was blamed on tariffs, with high oil prices being a big factor as well. It’s interesting to see that prices were passed through to users because the PPI and CPI numbers have been weak.

This could signal inflation will increase slightly in September. On the other hand, pre-production inventories rose the quickest since December 2016, signaling the shortages might come to an end.

Just like we’ve seen in almost all the manufacturing reports, hiring was the slowest in 3 months. The Markit report is still weaker than the ISM PMI, but the difference between the two shrunk this month.

Even though this was a strong report, Q3 overall had the lowest Markit PMI since Q4 2017.

Global Manufacturing - JP Morgan Global PMI Weakens

It’s no surprise that the JP Morgan global manufacturing PMI weakened again in September. By falling from 52.6 to 52.2, it reached a 22 month low.

The output index fell from 53.3 to 52.4 and the new orders index fell from 52.5 to 52.1. The decline in new exports from 50.3 to 49.7 means they are shrinking. This is in part due to tariffs.

The good news is inflation pressures fell as the input price index fell from 61.2 to 60.7 and the output price index fell from 54.3 to 54.1. The future output index fell to 61 from 61.7.

As you can see from the chart below, the CE world GDP index is correlated with the global manufacturing PMI. This decline signals global growth could fall from about 4% to about 3%.

Global Manufacturing - More Countries Growing

We’re in an unusual situation because the overall global manufacturing PMI fell. Yet more countries are in expansion territory. As you can see from the chart below, early in 2018 about 80% of countries’ manufacturing PMIs were in expansion territory. Now 91.7% are expanding.

This is because more small countries are improving while large countries are bringing the overall total lower.

Global Manufacturing - Chinese Growth Slows To A Standstill

The catalyst for the slowdown in overall growth is the weakness in China. As you can see from the chart below, the Caixin manufacturing PMI fell from 50.6 to 50 in September. This is stagnation.

This is the first stagnation in 15 months. New exports fell at the fastest rate since early 2016.

Businesses showed the weakest amount of optimism this year as tariffs are having a big impact on an economy which was already decelerating. The rate of job cuts was at a 14 month high and backlogs rose at the slowest pace this year.

Global Manufacturing - ISM PMI Decelerates, But Still Strong

This wasn’t a weak September ISM manufacturing PMI. But it was below expectations as it came in at 59.8. Consensus was for 59.9. The prior report was extremely optimistic as it was 61.3.

I was expecting a better report than this because the regional Fed manufacturing reports were optimistic.

As you can see from the chart below, new order growth in the regional Fed reports fell in August and rose in September. New order growth from the ISM report improved in August and fell in September.

As you can see from the chart below, the new orders index fell 3.3 points to 61.8 and the production index rose 0.6 to 63.9. There was a big decline in the price index as it fell from 72.1 to 66.9.

We’ve seen other manufacturing data point to a deceleration in price increases. It’s interesting to see such declines with tariffs and oil prices pressuring inflation.

Even though the PMI fell from 61.3 to 59.8, it was above the 12 month average of 59.2. It was the 4th best reading this year.

Global Manufacturing - 5.1% GDP Growth Unlikely

This report is consistent with 5.1% GDP growth. That simply isn’t going to happen this quarter. The hard data has diverged from the soft data. Inventories being built and increased August aircraft production will help Q3 growth.

The heightened trade deficit and weak July aircraft production should hurt growth.

The Atlanta Fed GDP Nowcast is anticipating $108 billion worth of increased inventories. In the CNBC rapid recap, the median estimate for GDP growth, which includes 13 estimates, is for 3.1% growth.

Remember, there was a spurt of soybean exports in Q2 which boosted exports and drew down inventories. Now the reverse is happening.

The underlying growth in Q3 should fall slightly. But it’s still impressive given the slight negative overhangs from the trade battles and hurricane Florence.

Global Manufacturing - Conclusion

The information presented in this article suggests China is being hurt a lot more than America is by this trade war.

I think weaker economic data from China pushes us closer to an agreement because China doesn’t want to see growth fall even further. According to Markit, the American manufacturing sector, which is impacted the most by slowing trade growth, is actually doing better than the service sector.

 

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