Global Manufacturing Update
By Chad Moutray, Chief Economist, National Association of Manufacturers
Manufacturers are facing some significant headwinds from sluggish growth abroad and from a U.S. dollar that has strengthened sharply over the past few months. According to the Federal Reserve Board, the trade-weighted U.S. dollar index against major currencies has risen from 75.6968 on July 1 to 91.5660 on March 6, a 21% increase. Along those lines, the euro has fallen to its lowest levels since January 2003. It peaked in 2014 on May 6 at $1.3924 for each euro. On March 12, it closed at $1.0640 to the euro, with some expectations that it will move to parity soon. It last reached parity in November 2002. Overall, these developments could hurt the ability of manufacturers in the United States to grow exports. (Some recent comments from me in the media on this topic can be found in the Financial Times, The New York Times, and The Washington Post.)
Reduced crude oil prices have posed another challenge. Beyond the negative impacts seen throughout the energy sector and its supply chain in the United States, lower petroleum prices have also hampered growth in Canada, our largest trading partner. The Royal Bank of Canada (RBC) Canadian Manufacturing PMI dropped from 51.0 to 48.7, its first contraction since March 2013. Canada was one of two countries among our top 10 markets for U.S.-manufactured goods—the other being Brazil—that had negative sentiment in February. Each slipped below the threshold level of 50 in their PMI values for the month, with China and Hong Kong shifting into the growth column this time. In contrast to these nations, Mexico and the United Kingdom had the fasted paces of expansion in their manufacturing sectors among our top 10 trading markets last month.
Despite some challenges, the global economy continues to expand modestly. The J.P. Morgan Global Manufacturing PMI edged marginally higher, up from 51.7 in January to 52.0 in February. This marks the fastest pace in four months. This measure not only reflects improvements in the U.S. economy, but also some incremental progress in China, Europe, and the emerging markets. Each had slightly better data on new orders and output. Yet, weaknesses persist. Eurozone real GDP grew 0.3% in the fourth quarter, or 1.3% on a year-over-year basis. In addition, industrial production in the Eurozone declined 0.1% in January. Many observers continue to worry about deflation, with the latest annual inflation data showing a decline of 0.3% in February, exacerbating those concerns. Moreover, the unemployment rate remains elevated at 11.2%. It is for that reason that the European Central Bank will spend 1 trillion euros over the next 18 months to help stimulate the European economy as part of its quantitative easing program.
Meanwhile, manufacturing activity in China bounced back from two straight months of decline, but its economy continues to decelerate. After growing 7.3% year-over-year in the fourth quarter, China has reduced its target real GDP growth rate for 2015 to 7%. Along those lines, a number of recent indicators have reflected slower paces of growth. This included industrial production, fixed asset investments, and retail sales. Investments from manufacturers have fallen from 13.5% year-over-year in December to 10.6% in January/February. It is worth noting that each of these growth rates is strong relative to other nations, but the challenge is that growth remains much less than what we have become accustomed to for China.
Action of trade legislation, particularly Trade Promotion Authority (TPA), is now expected in the April-May timeframe, as efforts to negotiate a bipartisan, bicameral TPA bill continue. New legislation reauthorizing the Export-Import (Ex-Im) Bank has been introduced in the House, while work on crafting a bipartisan Senate bill continues. Other manufacturing legislative priorities are also stacking up. Trans-Pacific Partnership (TPP) talks are ongoing in Hawaii this week, and the next round of the U.S.-EU talks move forward in mid-April. Efforts to negotiate sectoral tariff-cutting talks and broader multilateral talks are ongoing at the World Trade Organization (WTO). Product-specific export control reform also continues.
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.