Global Manufacturing Update
By Chad Moutray, Chief Economist, National Association of Manufacturers
July 18, 2016 – It has been a momentous couple of weeks in the global economy, spurred by a tremendous amount of volatility in financial markets following the United Kingdom’s vote of June 23 to leave the European Union (EU). In the aftermath of that election, equity markets around the world moved lower and international investors flocked to “safe havens” – including the United States – to park their money. This has pushed 10-year Treasury yields to historic lows, which should benefit homeowners, many of whom are taking advantage of the opportunity to refinance or purchase a new home. But, it also pushed the U.S. dollar higher. Indeed, the dollar appreciated 14.5% versus the British pound in the two weeks following the U.K. election, with the pound falling to its lowest level since 1985. Since then, things have calmed down a bit, helped along by the selection of a new U.K Prime Minister Theresa May, who took over on July 13. In addition, the surprise decision by the Bank of England this morning to keep rates unchanged sent the pound higher. All told, the British pound has now appreciated around 10% over the past three weeks, as of this morning.
Interestingly, the rest of Europe was more upbeat in the latest Markit Eurozone Manufacturing PMI, which increased to its highest reading since December. The survey was conducted from June 13 to 23, which means that all responses were collected before results from the British vote to leave the EU were known. With that in mind, it will be interesting to see how sentiment has shifted post-election, both in Britain and the Eurozone. Despite the more-positive sentiment survey readings, Eurozone industrial production fell 1.2% in May, nearly offsetting the 1.4% gain seen in April. On a year-over-year basis, industrial production grew 0.5%, a very modest pace. Nonetheless, retail sales were stronger, and the unemployment rate fell to 10.1%, its lowest level since July 2011.
While the currency impacts of the British EU exit, or Brexit, have been largest for the U.K., it exacerbates a strong-dollar trend that continues to challenge manufacturers in the U.S. Indeed, the trade-weighted U.S. dollar index against major currencies from the Federal Reserve Board has increased nearly 20% since the end of June 2014. That continues to represent a significant appreciation in the dollar in a two-year period, making it more difficult for manufacturers to sell abroad. Using non-seasonally adjusted data, U.S.-manufactured goods exports totaled $431.45 billion year-to-date in May, down 7.5% from $466.49 billion in May 2015. Moreover, exports were lower in the top five markets for U.S.-manufactured goods: Canada, Mexico, China, Japan, and the U.K.
On the positive side, the J.P. Morgan Global Manufacturing PMI edged higher in June, expanding ever so slightly after being stagnant in May, and we have seen some progress in terms of the number of key markets experiencing manufacturing growth. Nine of the top 15 markets for U.S.-manufactured goods had expanding levels of manufacturing activity for the month, up from five in April and eight in May.
Yet, there were five countries experiencing contractions in June – all with long-running challenges. Those markets were Brazil, China, France, Hong Kong, and Japan. We will get new data on Chinese industrial production, retail sales, and fixed-asset investment on July 15, but recent data have reflected a continued deceleration in activity. At the same time, the Caixin China General Manufacturing PMI has now contracted in 18 of the past 19 months. Meanwhile, Brazil – which will be in the international spotlight next month with the Olympics – remains mired in a deep recession. In Brazil, first-quarter real GDP was off 5.4% year-over-year, with industrial production down 8.9% over the past 12 months in May, using seasonally adjusted data. Meanwhile France remained the weakest economy in the Eurozone, contracting for the fourth consecutive month on weaker orders and production.
Trade policy issues continue to be front and center in the public discourse, which the NAM is addressing through multiple avenues. Efforts continue to move forward the Trans-Pacific Partnership (TPP) and a fully functioning Export Import (Ex-Im) Bank on the Hill, along with gearing up for the new Miscellaneous Tariff Bill (MTB) process. Talks on the Transatlantic Trade and Investment Partnership (TTIP) negotiations and the environmental goods talks continue this month. A new World Trade Organization (WTO) case against China’s market-distorting export taxes on nine raw materials was launched this week. Manufacturers are also watching closely new developments on direct flights to Cuba and on conflict minerals in the United States and the EU.
Excerpt reprinted with permission. For the full report, visit www.nam.org.
The National Association of Manufacturers (NAM) represents small and large manufacturers in every industrial sector and in all 50 states. For more information, visit www.nam.org.