Manufacturers remain plagued by bottlenecks, cost pressures and weakening demand from abroad

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  • Activity levels across the global manufacturing sector grew at the slowest pace in a year last month, continuing to lose momentum from the levels seen earlier in the year.
  • New orders and new export orders — lead indicators on activity levels — both weakened during the month, hinting the slowdown may continue in the months ahead.
  • Markets will receive separate information on global service sector activity levels on Friday. This sector dominates economic activity in most advanced nations.

A sector plagued by increasing supply-chain bottlenecks, cost pressures and weakening demand from abroad, leading to a slowdown in production levels and slower hiring levels.

That’s the brief and slightly unsettling report card from the global manufacturing sector in July with activity levels growing at the weakest pace in a year.

IHS Markit’s Global manufacturing PMI, produced in conjunction with JP Morgan, fell to 52.7 last month after seasonal adjustments, down marginally from 53.0 in June.

It was the lowest level in a year with the slowdown broad-based in nature.

For those not familiar with PMIs, a reading above 50 signals that activity levels are improving while a reading below suggests they’re deteriorating. The distance away from 50 indicating how quickly activity levels are expanding or contracting.

So activity levels still improved last month, albeit at the slowest pace in a year.

As seen in the chart below from IHS Markit, after a solid recovery from the middle of 2016, momentum across the sector is now starting to slow.

IHS Markit

“The slowdown reflected weaker growth in the consumer and investment goods industries. PMI readings for these subsectors fell to 13 and 10-month lows respectively, as rates of expansion eased for both production and new orders,” IHS Markit said.

“The intermediate goods sector PMI ticked up to a three-month high, with its output and new business components signalling stronger increases compared to June.”

So it was a mixed performance by production stage, mirroring similar themes across specific geographic region.

“The US remained one of the strongest performing national manufacturing sectors in July. Although the US PMI dipped to a five-month low, it remained at a solid level and comfortably above the global average,” IHS Markit said.

“The euro area was also a bright spot, achieving a rate of expansion close to that of the US. That said, the Eurozone PMI is currently much lower than the highs scaled before the turn of the year.

“Growth across Asia remained subdued compared to that seen in Europe and the US with PMI readings for China, Japan, India, South Korea, Indonesia, Malaysia, the Philippines, Myanmar and Thailand were all below the global average.”

Weighing on the Asian region, the group said activity levels in the two largest manufacturing nations — China and Japan — grew at the slowest pace in eight and 11 months respectively.

While the performance by region and production stage was mixed during July, individual activity subindexes weakened across the broad, all growing at a slower pace compared to June.

With the exception of future output expectations which improved modestly to still-elevated levels, all other components grew slower that a month earlier.

IHS Markit

Suggesting the slowdown may persist in the months ahead, the new orders and new export orders subindexes — lead indicators on future activity levels — both weakened, especially the latter which grew at the slowest pace since September 2016.

“Part of the slowdown in new business growth reflected a subdued picture for international trade flows,” IHS Markit said.

“The pace of increase in new export orders eased to near-stagnation and was the weakest during the current two-year sequence of expansion… [with declines reported in] the US, China, France, Russia, Indonesia, Brazil, and Austria.”

That’s a sure sign that trade activity is slowing fast, particularly among major nations.

Fitting with the weaker demand from abroad, output and employment growth both slowed.

And despite a deceleration in input and output price pressures, the latter continued to increase significantly slower than the former, indicating continued margin pressures for manufacturers.

While another soft report — particularly the lead indicators — David Hensley, Director of Global Economic Coordination at JP Morgan, remained optimistic towards the outlook.

“The manufacturing upturn has lost sizeable momentum since the start of the year,” he said.

“However, with final demand growth having firmed in recent months and signs that an inventory drag is nearing an end, we think output gains will strengthen in coming months.”

Time will tell if he’s right, but with momentum in the US economy likely to slow in the quarters ahead, and with growth elsewhere losing momentum, there has to be some doubt, particularly as trade tensions between the United States and China continue to increase.

The global manufacturing PMI surveys over 12,000 purchasing executives from over 40 countries, accounting for an estimated 95% of global manufacturing output.

Later this week, IHS Markit will release its global services PMI report for July, providing a snapshot of activity levels for the sector that dominates economic growth in many advanced economies.

If a similar result to the manufacturing sector is recorded, it will not bode well for global economic activity in the September quarter.

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