‘A Sea Of Red’: Manufacturing Malaise Says World’s Ablaze

As July melts into August, the world remains mired in a seemingly intractable factory slump.

Manufacturing PMIs for major economies from Europe to Asia stayed below the 50 line that separates expansion from contraction last month. Although some gauges showed signs of improvement, and although not every gauge in Asia is sitting sub-50, the broader outlook is as bleak as it’s been in years.

In Europe, for instance, Germany is serving as a severe drag. Manufacturing in the bloc contracted for a sixth straight month to kick off Q3 and Q2’s growth and inflation data out Wednesday provided little in the way of evidence to suggest the tide is turning. “The euro area’s manufacturing sector continued to contract during July, and at an accelerated rate”, IHS Markit remarked on Thursday.

Chris Williamson, the group’s Chief Business Economist, called the Eurozone PMI dashboard “a sea of red, with all lights warning on the deteriorating health of the region’s manufacturers”.

“July saw production and jobs being cut as the fastest rates for over six years as order books continued to decline sharply. Prices fell at the sharpest rate for over three years as firms increasingly competed via discounting to help limit the scale of sales losses”, Williamson continued, underscoring the scope of the malaise. “Forward indicators also deteriorated and input buying fell to an extent not seen since 2012 as firms prepared for weaker production in the short term, and expectations for the year ahead likewise fell to the lowest in over six-and-a-half years”.

Meanwhile, gauges in Japan and South Korea reman below the demarcation line, and the diplomatic dispute between Tokyo and Seoul is poised to make things worse.

“There was no respite for South Korean goods producers at the start of the third quarter, as the latest PMI data signaled a deeper downturn in the manufacturing sector”, Joe Hayes, another economist at IHS Markit, said Thursday. “The index was only fractionally above February’s near four-year low and demand conditions for South Korean goods remain unfavorable [as] escalating tensions with Japan add further concern”.

Little wonder, then, that the US dollar continues to hold up, much to the chagrin of an aggrieved Donald Trump. Of course, it is the US administration’s trade policies which are in part responsible for the global downturn, and the administration’s fiscal policies which have (so far anyway) insulated the US economy. The relative outperformance of the US (and thereby the strength of the dollar) are the direct result of Trump’s policy mix.

Where things go from here will largely depend on the evolution of stalled trade talks – and there’s something rather silly about using the word “evolution” with the word “stalled”.

“Actual activity data show broad-based weakness as evident from the dwindling exports from Japan, Korea, and Singapore, and Purchasing Manager’s Indices above 50 for only 15 (37%) out of 41 countries, the lowest level since July 2012”, BofA wrote Monday, on the way to reminding you that the global PMI has been in the contraction for two months running and sits at its lowest level since October 2012.

(BofA)

The only two questions going forward are:

1. whether the global manufacturing slump will make landfall in the US, and
2. whether it will spill over into the services sector and, eventually, the labor market

The latest read on the Chicago PMI suggests the answer to the first question is “yes”. On Thursday, ISM printed 51.2 for July, down from 51.7 in June and below consensus (52).

The gauge is now at its lowest since August of 2016.

Employment fell to 51.7 versus 54.5 and new export orders dropped to 48.1.