U.S. MANUFACTURING PMIs

• S&P Global: Factory employment falls at sharper pace as manufacturing downturn deepens

The seasonally adjusted S&P Global US Manufacturing Purchasing Managers’ Index™ (PMI^®) remained below the 50.0 no-change mark in September, dipping to 47.3 from 47.9 in August. The index signaled a third consecutive monthly worsening in the health of the sector, and one that was the most pronounced since June 2023.

Central to the deterioration in business conditions was a sharply worsening demand environment amid a slowdown in the wider economy and uncertainty around the upcoming Presidential Election.

New orders decreased for the third month running, with the rate of contraction the sharpest in 15 months. New export orders were also down to a larger extent than in August, as geopolitical issues and demand weakness (notably in Europe) led to a fourth consecutive decline.

With new orders continuing to fall, manufacturers scaled back their production for the second month running. The pace of decline was modest, yet the fastest since June 2023.

Firms also reduced employment for the second consecutive month in September. The fall in staffing levels was the steepest since January 2010 if the initial pandemic period in 2020 is excluded.

Manufacturing output decreased less quickly than new orders as firms worked through outstanding business and added to holdings of finished goods. The resulting drop in backlogs of work was the largest since January, while post-production inventories were accumulated for the third month running.

Meanwhile, a sharp and accelerated contraction in purchasing activity was recorded amid lower output requirements, with the latest fall in input buying the most marked in 2024 so far. This fed through to a further reduction in stocks of inputs, albeit one that was only marginal as some firms looked to build inventories ahead of expected improvements in demand heading into next year.

A further decline in demand for inputs meant that suppliers were able to speed up deliveries for the second month running in September, with the rate of improvement in vendor performance broadly in line with that seen in August.

Manufacturers continued to be faced with sharply rising input prices. Higher costs for raw materials such as cardboard and paper were accompanied by reports of higher shipping rates. The pace of inflation eased slightly from the previous month, however.

In contrast to the picture for input costs, the pace of output price inflation quickened, reaching the highest since April.

Firms were generally optimistic that output will increase over the coming year, with confidence often due to expectations that demand will improve following the Presidential Election. Lower interest rates also supported confidence, which ticked up to a four-month high but remained a touch weaker than the series trend.

• The ISM:

The Manufacturing PMI^® registered 47.2 percent in September, matching the figure recorded in August. (…) (A Manufacturing PMI^® above 42.5 percent, over a period of time, generally indicates an expansion of the overall economy.)

The New Orders Index remained in contraction territory, registering 46.1 percent, 1.5 percentage points higher than the 44.6 percent recorded in August.

The September reading of the Production Index (49.8 percent) is 5 percentage points higher than August’s figure of 44.8 percent.

The Prices Index went into contraction (or ‘decreasing’) territory for the first time this year, registering 48.3 percent, down 5.7 percentage points compared to the reading of 54 percent in August.

The Employment Index registered 43.9 percent, down 2.1 percentage points from August’s figure of 46 percent.

The Backlog of Orders Index registered 44.1 percent, up 0.5 percentage point compared to the 43.6 percent recorded in August.

The New Export Orders Index reading of 45.3 percent is 3.3 percentage points lower than the 48.6 percent registered in August.

The Imports Index remained in contraction territory in September, registering 48.3 percent, 1.3 percentage points lower than the 49.6 percent reported in August.”

WHAT RESPONDENTS ARE SAYING

• “North America demand has started to weaken. Asian demand is slightly higher but shows signs of weakness in future months. Comments tied to automotive builds.” [Chemical Products]
• “Global demand continues to remain soft. Fourth-quarter forecasts have been further reduced, with several new programs shifted from 2024 to 2025. Manpower, working capital and supplies are being flexed down in response. The previously anticipated shift from internal combustion engine to electric vehicle (EV) technology has been pushed out due to market response. Long-range plans are being adjusted to incorporate traditional products for longer, while new EV product offerings are being planned for slower rollouts.” [Transportation Equipment]
• “The strategy of customer push-outs last year enabled those customers to adapt to the market. Now, while most companies are seeing a slowdown, we are seeing solid growth. The general slowdown in the economy is allowing for prices to continue to stabilize.” [Computer & Electronic Products]
• “A continuing low order rate is resulting in ongoing manufacturing adjustments to balance output with demand.” [Machinery]
• “The fourth quarter is slower than anticipated. We won’t realize the effect of interest rate adjustments with new project starts until the first quarter of 2025.” [Fabricated Metal Products]
• “Business is flat. Waiting for interest rates to drop and the election outcome in November before we confirm our 2025 plans. Currently planning on a flat 2025.” [Furniture & Related Products]
• “Our sales continue to be flat. Our customers are telling us that although our products perform very well, they are forced to seek lower-cost components to maintain their sales.” [Textile Mills]
• “Sales have slowed this quarter compared to the same time period last year. Adjusting production accordingly.” [Miscellaneous Manufacturing]
• “Still hiring to fill vacant positions in production/management. Not adding new jobs. Automotive original equipment manufacturers (OEMs) are starting to slow or cancel orders. The pace is slowing.” [Primary Metals]

Canada: PMI signals slight growth of manufacturing sector inSeptember

Registering 50.4, up from 49.5 in August, the seasonally adjusted S&P Global Canada Manufacturing Purchasing Managers’ Index™ (PMI^®) edged back above the critical 50.0 no-change mark in September to signal a first improvement in operating conditions since April 2023.

The PMI was supported by a slight rise in new orders, the first in nearly a year-and-a-half. Growth was reported to be reflective of an uplift in market demand and the release of new product lines. However, there were still many reports that underlying demand conditions remained subdued, especially from foreign clients. Indeed, new export orders declined again in September, and to a greater extent than in August. Latest data marked the thirteenth successive month in which a fall in new export work has been registered.

Production levels were only fractionally lower in September, with the Output Index rising to a seven-month high and indicating a near-stabilisation. Output was weighed down to some degree by efforts to meet sales directly from stock wherever possible. September’s survey showed that inventories of finished goods declined for the first time in five months.

Manufacturers also remained reticent to buy-in new inputs as evidenced by a drop in purchasing activity for the twenty-sixth successive month. Inventories of inputs were instead utilised, as signalled by a decline in stocks of purchases for the second time in the past three survey periods. (…)

Average input prices meanwhile rose again in September. The rate of inflation picked up, reaching its highest level since April 2023 as a wide range of goods were reported to have increased. However, with market conditions still subdued, manufacturers had limited pricing power to pass on these higher input costs to clients. Overall, output charges rose only modestly and at a noticeably slower degree than in August. (…)

Positive projections for the future helped to explain why firms took on extra staff in September. Employment overall increased for the second time in the past three months, albeit only marginally.

To sum up the global manufacturing industry:

Global Manufacturing PMI signals contraction for third successive month in September

Four of the five PMI components were at levels consistent with contraction in September, as output, new orders, employment and stocks of purchases all fell. Only the (inverted) suppliers’ delivery times index made a positive contribution to the headline PMI.

New orders fell for the third consecutive month, with the pace of contraction the steepest since December 2022. The trend in international trade also remained weak, as the rate of contraction in new export orders hit an 11-month record.

Data broken down by sector pointed to a widespread malaise across global industry. The intermediate and investment goods sectors both saw production contract in September and, although still expanding, the rate of growth in the consumer goods category remained tepid at best. All three sub-industries also saw contractions in both total new orders and new export business.

Staffing levels fell for the second month in a row and to the greatest extent since December 2023.

Confidence dipped to a 22-month low and fell across the three sub-industries covered by the survey. The cyclically sensitive new orders-to-inventory ratio also fell to its lowest level since December 2022.

At the national level, a depressed Euro area output PMI points to a very weak industrial sector while China looks to be stagnating. Even the US output PMI, which stood out with a modest step up in its earlier flash estimate, saw this improvement wiped away in today’s final release.

The U.S. economy is blessed by its large service economy, but a contracting goods sector necessarily also impacts demand for services.

Jobs Market in Stasis

Job openings partially rebounded to 8.04 million in August, but looking through the month-to-month noise, openings are down 13.9% from a year ago and 8.8% from six months ago.

The job opening rate in August rose to 4.8%, somewhat above the 4.5% averaged in 2019. The modest rise in job openings paired with August’s tick down in unemployment resulted in a small increase in job openings per unemployed person to 1.13 from 1.08 in July.

This leaves one of the Fed’s favorite metrics of balance in the labor market cooler than 2018-2019 levels but still above the 1.00 ratio that indicates there are more jobs available in the economy than workers currently seeking employment. On balance, the slight bounce in job openings in August’s JOLTS report offers some comfort that labor demand is not yet deteriorating in a non-linear way.

Still, the job openings-to-unemployed ratio is only informative in the aggregate and does not say anything of potential mismatch between those looking for work and firms looking to hire. In particular, labor demand continues to be concentrated in just a few industries. In August, job openings increased the most in construction (+138K) and in state & local government (+106K), while the largest declines in openings were in financial activities (-52K) and other services (-93K).

Although the total opening rate remains above its pre-pandemic level, a handful of industries have seen the vacancy rate slip below their 2019 marks. (…)

  

Through the month-to-month volatility, the three-month moving average of the hiring rate is now as low as it was in July 2013, when the labor market was considerably weaker than it has been in recent years. The quit rate fell further in August, and its three-month moving average is now sitting below 2% for the first time since the fall of 2015 (excluding the pandemic-low in 2020).

With fewer hires and fewer voluntary separations, the labor market is increasingly in stasis. The slowdown in turnover is to be expected after years of feverish churn, but as analysts search for nascent signs of stabilization in softening labor demand, the continued decline in the hiring and quits rates is not a good sign.

Involuntary separations in the form of layoffs and other discharges remain the bright spot in a largely static labor market. The layoff & discharge rate sank back to 1.0% in August, still noticeably below its pre-pandemic level. Although demand for new workers keeps cooling, employers remain reluctant to let go of existing workers. Yet, this precarious situation for the labor market shows why the FOMC is moving monetary policy back toward a more neutral setting.

On net, the JOLTS data for August continue to wave the caution flag. The bounce in openings and still-low layoff rate are good news and suggest a still-healthy labor market. That said, the continued decline in labor market turnover is consistent with the survey data pointing to deteriorating confidence in labor market prospects. Hiring and quit rates falling to mid-2010s levels do not inspire much confidence about the direction of travel.

For the Fed, the bigger piece of new information will come on Friday with the September jobs report. We are expecting nonfarm payroll growth to have slowed slightly to 135K with an unchanged unemployment rate of 4.2%. Our forecast for a 25 bps rate cut at the November [6-7] FOMC meeting is conditional on a September employment report that does not come in materially weaker than our forecast. As the balance of risks to the Fed’s dual mandate has shifted to maintaining full employment, any unexpected weakness in this Friday’s report could push officials to deliver another outsized rate cut.

Indeed Job Postings (through Sept. 20) continue to suggest a stabilizing labor market.

Saudi Minister Warns of $50 Oil as OPEC+ Members Flout Production Curbs Kingdom called out members for overproducing, in what was seen as a veiled threat of a price war

The Saudi oil minister has said that prices could drop to as low as $50 per barrel if so-called cheaters within OPEC+ don’t stick to agreed-upon production limits, according to delegates in the cartel.

The statements were interpreted by other producers as a veiled threat from the kingdom that it is willing to launch a price war to keep its market share if other countries don’t abide by the group’s agreements, they said. (…)

There are fears in the West that a wider war could choke oil exports from the Gulf that pass through the Strait of Hormuz, which borders Iran, and push prices higher. 

But geopolitical tensions have persisted for months without meaningful effect on oil prices, and the declines have been frustrating for Saudi officials in part because other cartel members have flouted plans to limit production for much of this year.

During a conference call last week, Prince Abdulaziz bin Salman, the oil minister of OPEC kingmaker Saudi Arabia, warned fellow producers prices could drop to $50 a barrel if they don’t comply with agreed production cuts, according to OPEC delegates who attended the call.

They said he singled out Iraq, which overproduced by 400,000 barrels a day in August, according to data provider S&P Global Ratings, and Kazakhstan, whose production is set to rise with the return of the 720,000-barrels-per-day Tengiz field. (…)

The group’s production cuts mean their share of the oil market has shrunk. This year it reached 48%, down from 50% in 2023 and 51% in 2022, data from the IEA showed. Competition is set to heat up further next year.

Planned production increases in the U.S., Guyana and Brazil are expected to add over 1 million barrels a day to global oil supply. Brazil joined the OPEC+ group this year but said it won’t participate in the output cuts.

Some cartel members that signed on to the cuts have pumped more barrels than they promised, rendering the supply curbs less effective. In addition to Iraq and Kazakhstan, Russia also produced more than its quota this year through July, according to Aug. 8 data from S&P Global. (…)

The kingdom has shown in the past it can open up the spigots if it feels other producers are taking advantage of its efforts to defend oil prices. (…)

• The Oil Price That Matters Now Is $50 a Barrel, Not $100 The price of crude is more likely to decline than increase in the foreseeable future.

(…) All things being equal2, the oil market looks oversupplied in 2025, and that means lower rather than higher prices — so given a binary choice between $100 and $50 for next year, I’d take the latter bet despite all the Middle East geopolitical risk. (…)

First, OPEC+ has tacitly recognized that its $100 policy was boosting annual non-OPEC+ supply growth above trend demand. Sticking to its high prices strategy meant accepting an ever-declining market share. Second, the cartel accepts that elevated crude levels hurt demand growth, and sustaining consumption is important in the face of the energy transition. Third, the global economic cycle has turned, and oil, just like every other commodity, is sensitive; lower prices are the natural consequence of weaker growth. Fourth, several OPEC+ members have invested billions of dollars in new production capacity and have pushed to pump more, challenging the strategy. To avoid a schism, the group has had to change its overall reaction function. (…)

Here are the options I see:

1) OPEC+ cheaters stop their over-production and Saudi Arabia and others in the cartel have a change of heart, fearing a price slump. Rather than increasing production, they cut output in early 2025. Wrongfooting most traders, the cartel sends oil prices back into the $80-$100 range. Never say never, but I would be shocked if that scenario materialized as I believe OPEC+’s reaction function has changed.

2) OPEC+ compliance improves dramatically, including via compensation cuts by the cheaters. The group delays the monthly production increases for six months, in turn avoiding a jump in inventories in early 2025. In that scenario, oil finds a floor around $70 and moves back toward $80. I don’t think Riyadh is contemplating delaying the output increases forever, but I see some scope for the kingdom agreeing to wait until the second half of next year. One reason is a bet that US shale growth is moderating; another is the hope that Beijing will successfully refloat its economy, boosting oil demand. This scenario gets a maybe from me.

3) The cartel sticks to its plan to boost output in monthly increases from December onward as compliance improves somewhat. The Saudis cut spending to weather a period of low prices — something already flagged in the preview of the country’s 2025 budget. In that scenario, the oil market would be oversupplied next year, particularly during the second quarter, when seasonally demand is lower. The resulting inventory build-up pushes oil prices toward $60 and perhaps — even if only briefly — even lower toward $50 during the second quarter of next year, before recovering later in the year as US shale production growth slows down due to low prices. To me, this is the most likely scenario.

4) OPEC+ compliance doesn’t improve at all. In response, the cartel not only goes ahead with the monthly output increase from December, but Saudi Arabia pushes the group into accelerating production of those extra barrels. As a result, the market is hugely oversupplied, and oil prices drop to $50 and even lower. The market doesn’t crash, however, because Riyadh stops shorts of launching a full price war. I sense that this outline, whispered by some OPEC+ officials and echoed by oil traders who say they’ve been told about it, is a not-so-quiet Saudi campaign of verbal threats so the cheaters improve compliance. As such, I don’t consider it as likely.

5) A full-scale price war. Compliance doesn’t improve at all and gets even worse. Saudi Arabia raises production to its maximum capacity of 12.5 million barrels a day, up from today’s output of 9 million. Every other OPEC+ country follow suit. The market faces a huge glut similar to what was witnessed in 2020 — and prices crash. If history is any guide, the $50-a-barrel level won’t act as a floor, and prices would likely plunge much, much lower. (…) As things stand, this final scenario looks extremely unlikely to unfold. But Saudi Arabia has fought two price wars in the past decade, so we should at the very least entertain the possibility of it occurring. (…)

John Authers:

How would Israeli retaliation to this play out? One plausible scenario is to inflict economic damage on Iran’s oil industry, which makes up about half of Tehran’s budget, possibly by attacking refineries. That would reduce supply. And as the war expands, Bloomberg Intelligence’s Ziad Daoud argues that there’s a broader risk to supply, via ports and the vessels plying the busy routes.

If Iran were to try to block the Strait of Hormuz, the impact on oil flows would be profound. The current supply abundance can’t replace potential outages from the Gulf Cooperation Council,1 Iran, and Iraq, he says. (…)

Last night:

“Iran made a big mistake tonight, and it will pay for it,” Israel’s Prime Minster Benjamin Netanyahu said. “The regime in Iran does not understand our determination to defend ourselves and our determination to retaliate against our enemies.” What form that retaliation now takes will be critical.

Israel has no choice but to respond, Avi Melamed, a former Israeli intelligence official, told me, as soon as the barrage had ended. This time he expected it to be swift, and on a much larger scale than in April. (…)

The IDF can now force an even more acute dilemma on the Iranian regime. A bigger Israeli missile attack will destroy more assets and be much more publicly visible than April’s. Dismissing Israel’s drones as toys, as regime officials did last time, won’t work. Khamenei and his generals will have to decide whether to do nothing, and lose still more credibility and deterrence power, or risk a potentially disastrous war that could even draw in the US, by striking back. (Bloomberg)

Auto Sales Are Idling as Prices Remain High U.S. car sales are stuck below prepandemic levels despite better vehicle availability, more deals

Industrywide third-quarter U.S. vehicle sales fell 1.9% compared with a year earlier, according to an estimate from research firm Wards Intelligence. Most major automakers reported results for the July-to-September period on Tuesday. (…)

Analysts say the industry’s U.S. sales tally was dented by disruption from Hurricane Helene, which hit the Southeast on the final weekend of September, typically a busy selling period. (…)

The sluggish third-quarter results put automakers on pace to finish the year with U.S. vehicle sales of around 15.7 million—a slight increase from last year, when supply-chain snags were still crimping vehicle output, but still well off historic highs. (…)

Carmakers posted five consecutive years of at least 17 million vehicle sales through 2019. Many analysts and dealers point to affordability as the primary reason why sales haven’t marched back to those levels. [Monthly payments on car loans still average $767, up 17% from four years ago, according to Cox.]

The average new vehicle in the U.S. sold for $44,467 in September, down nearly 3% from last year as automakers and dealers offer more discounts, according to industry tracker J.D. Power.

But that figure is up from about $34,600 at the end of 2019, reflecting years of sharp inflation during the pandemic, when a shortage of computer chips and other car parts crimped vehicle production. (…)

Consumers are also gravitating to more-affordable vehicles. Sales of smaller cars and SUVs are up over the past year, while sales of midsize cars and trucks and larger SUVs have declined, according to Cox. (…)

(CalculatedRisk)

Fed’s Powell Says Rate Cuts Can Sustain Soft Landing, but Sees No Need to Rush Central-bank leader calls the economy solid; ‘we intend to use our tools to keep it there’

Federal Reserve Chair Jerome Powell said officials would continue to reduce interest rates from a two-decade high to maintain solid economic growth, but they didn’t currently see a reason to lower rates as aggressively as they did at their most recent meeting.

“Overall, the economy is in solid shape; we intend to use our tools to keep it there,” Powell said Monday afternoon at a conference in Nashville, Tenn. Because officials have a relatively favorable economic outlook, “this is not a committee that feels like it’s in a hurry to cut rates quickly,” he added. (…)

“If the economy performs as expected, that would mean two more [quarter-point] cuts this year,” Powell said during a moderated discussion. Rates could move “over time” toward a more neutral stance if economic activity remained healthy, though he said rates weren’t on a preset path, meaning bigger cuts were possible if the job market shows greater deterioration. (…)

Policymakers are facing a puzzle because consumer spending and economic output have expanded steadily this year, but labor market data have shown a pronounced cooling trend. Revisions to government data last week suggested income growth, which had lagged behind measures of economic output, has been better than initially reported.

Those revisions mean personal savings rates have been higher than previously thought, and they provided some reasons for policymakers to be less anxious than they might have been about the economic outlook, Powell said.

At the same time, he cautioned that the latest revisions hadn’t resolved the recent tension between data pointing to solid spending but cooler hiring. The better news on recent years’ household income growth “is not going to stop us from looking really carefully at the labor market data,” Powell said.

BlackRock’s Fink Says Market Is Wrong on Fed Rate-Cut Bets Larry sees no landing, says US economy continues to grow

“I don’t see any landing,” Fink told Bloomberg Television’s Francine Lacqua in an interview Tuesday on the sidelines of the Berlin Global Dialogue 2024 conference. “The amount of easing that’s in the forward curve is crazy. I do believe there’s room for easing more, but not as much as the forward curve would indicate.”

Money markets imply a one-in-three chance the Fed will deliver another half-point cut in November, and price a total of about 190 basis points of easing by the end of next year. But Fink said it’s hard for him to see that materializing, as most government policies at the moment are more inflationary than deflationary. (…)

“There are segments of the economy that are struggling. There are segments of the economy that are doing really well,” said Fink. “We spend so much time focusing on the segments that are doing poorly.”

The CEO at BlackRock, the world’s largest asset manager, also said despite assets valuations and some geopolitical issues, the market isn’t facing any real systemic risk and sees corporate earnings continuing to do well.

“I would argue today that because of the expansion of the global capital markets, we’re diffusing more risk than ever,” he said. “There is actually less systemic risk today than ever before.”

MANUFACTURING PMIs

Euro area manufacturing production falls at steepest pace in 2024 to date

After three successive months of no change, the HCOB Eurozone Manufacturing PMI fell in September to 45.0, from 45.8 in August, to signal a marked and accelerated deterioration in the health of the euro area’s goods-producing economy. Notably, the survey’s headline index fell to its lowest level in the year-to-date and was below the average seen across the current 27-month downturn.

As per the general trend in 2024, pockets of growth appeared in the south of the eurozone. National PMI survey data revealed Spain as having the strongest-performing manufacturing economy in September, with growth here quickening to a four-month high. Greece also continued its expansion sequence, although the upturn cooled markedly to its weakest in a year. Improvements in the south were strongly offset by sustained weakness elsewhere, particularly in the euro area’s largest manufacturing sector, Germany, which recorded its most pronounced worsening of factory conditions for 12 months.

Goods production across the eurozone as a whole continued to decline at the end of the third quarter. Moreover, the pace of contraction was the quickest in the year-to-date. Lower output volumes were a response to the prevailing demand environment, which deteriorated further during September. The latest drop in new orders was sharp and the fastest since December last year. Sales performances were also adversely impacted by conditions overseas, with the latest survey data signalling an accelerated decrease in new business from abroad.

The HCOB PMI figures for September also indicated broad-based retrenchment by eurozone factories during the latest survey period. For example, purchasing activity shrank at the quickest pace since last December, while inventories of both pre- and post-production items were depleted more rapidly than in August. Furthermore, staffing capacity continued to be cut and the overall pace of job shedding was the most pronounced since October 2012, excluding pandemic-hit months.

With the level of incoming new orders shrinking further, eurozone goods producers made additional inroads to their backlogs of work at the end of the third quarter. The rate of depletion was sharp overall and the steepest in the year-to-date.

Meanwhile, the recent trend of shortening delivery times came to an end in September, latest HCOB PMI data indicated, as eurozone manufacturers reported minor delays from vendors. Nevertheless, input costs declined for the first time since May. The price of goods leaving the factory gate across the euro area also decreased in the final month of the third quarter. This contrasted with August, where selling prices were raised for the first time since April 2023. Overall, the extent to which charges were discounted was marginal, but the most pronounced in four months.

Looking ahead, eurozone manufacturers remained slightly optimistic on balance, with those forecasting growth over the next 12 months still outnumbering those predicting contraction. Nevertheless, the overall level of positive sentiment was its weakest in ten months and markedly below the series long-run average.

Japan: Manufacturing business conditions deteriorate slightly in September

At 49.7 in September, the headline au Jibun Bank Japan Manufacturing Purchasing Managers’ Index™ (PMI) dipped fractionally lower from 49.8 in August to indicate a slight decline in overall operating conditions.

Output fell for the second time in three months at the end of the third quarter, with the respective seasonally adjusted index only fractionally below the neutral 50.0 threshold. Firms often indicated a lack of incoming new business as a result of economic weaknesses. However, this was partially offset by firms opting to complete outstanding orders. As a result, backlogs of work fell at moderate pace that extended the current sequence of depletion to two years.

The level of new orders placed with Japanese manufacturers also fell in September, and at a moderate pace that was little-changed from that in August. Where sales fell, firms mentioned a stagnating economy and staff shortages were behind the reduction. International demand was also subdued, as new export sales contacted at a solid rate that was the strongest since March.

Japanese manufacturers continued to raise employment levels during the latest survey period. That said, the rate of job creation was fractional and the softest in the current seven-month sequence.

Input inventories were also raised in September, following two consecutive monthly reductions as firms held pre-production inventories in preparation for an eventual demand recovery. (…)

The survey’s price indices showed that inflationary pressures remained elevated across Japan’s manufacturing industry. Firms mentioned higher labour, logistics and raw material prices had been key factors behind higher cost burdens. Positively, the rate of inflation eased from August to reach the lowest for five months.

Firms opted to partially pass these higher costs to clients in the form of raised output charges. The rate of output price inflation eased however and was the slowest seen since June 2021.

China: Soft and softer

• Manufacturing new orders decline at fastest pace in two years

The headline seasonally adjusted Purchasing Managers’ Index™ (PMI®) fell to 49.3 in September, down from 50.4 in August. Falling past the 50.0 neutral mark, the latest data signalled that conditions in the manufacturing sector deteriorated following a brief improvement in August. While marginal, the rate of decline was the fastest since July 2023.

Incoming new orders for Chinese manufactured goods declined at the fastest pace since September 2022, attributed to falling underlying demand, heightening competition and subdued market conditions, according to panellists. This included export orders, with softening economic conditions abroad negatively affecting foreign demand. Firms in the investment goods sector recorded the fastest fall in overall new work.

Chinese manufacturers nevertheless worked through existing orders to support production, though the rate at which output expanded eased to the joint slowest in the current sequence, matched only by July’s marginal pace. The volume of unfinished work also shrank for the first time since February.

Overall confidence was affected by concerns over the global economic and trade outlooks. Optimism levels at Chinese manufacturers slipped to the second lowest recorded since data collection for this series began in April 2012. Firms also lowered headcounts amid reduced workloads and cost concerns.

Purchasing activity meanwhile declined amid reduced new work inflows and with adequate inventory holdings. In fact, the slowdown in production growth resulted in pre-production inventory holdings rising for a second successive month in September. Stocks of finished goods accumulated as well owing to outbound shipping delays and as new orders fell. Supply constraints and shipment delays notably led to another slight lengthening of lead times for the delivery of inputs to Chinese manufacturers.

The broad reduction in market demand also affected prices. Anecdotal evidence suggested that average input prices declined as orders fell. This included raw material such as metals. Manufacturers thereby lowered selling prices, including export charges, both to reflect lower input costs and to support sales as competition intensified. The rates at which input costs and output prices fell were the most pronounced in 15 and six months respectively.

This is weak!

• Service sector expansion close to stagnation in September

The seasonally adjusted headline Caixin China General Services Business Activity Index posted 50.3 in September, down from 51.6 in August. (…)

New business inflows for services firms in China expanded for a twenty-first straight month in September as underlying demand conditions improved. New product launches were often mentioned as reasons supporting higher demand as well. That said, the rate of expansion decelerated to the slowest in nearly a year. That was despite a solid expansion of export business. Anecdotal evidence suggested that a widening of sales channels and marketing efforts enabled exporters to bring in higher foreign orders.

Backlogs increased for a second successive monthly as a result of rising new work inflows. Firms therefore hired additional staff to cope with ongoing workloads. While marginal, the latest rise in employment marked only the third rise in staffing levels in the past eight months.

Turning to prices, average input costs increased in September,attributed to higher input material, labour and energy costs according to panellists. Furthermore, the rate of inflation posted above the series average to the highest in nearly two-and-a-half years.

However, firms were hesitant to raise prices despite the intensification of cost pressures. Average output prices fell for a second successive month. Although marginal, this was only the fourth time that selling prices have declined in the past three years. According to survey respondents, prices were lowered, and discounts were offered in an attempt to support sales amid heightened competition.

Finally, overall confidence fell in the latest survey period to the lowest since March 2020. While firms were broadly hopeful that better market conditions and promotional efforts can boost sales in the year ahead,some raised concerns over rising competition and the global economic outlook.

Commenting on the China General Composite PMI® data, Dr. WangZhe, Senior Economist at Caixin Insight Group said:

“In September, the Caixin China General Composite PMI measured 50.3, down 0.9 points from the previous month. Supply in both the manufacturing and services sectors expanded slightly, with a notable contraction in manufacturing demand. The shrunken labor market in manufacturing dragged on employment at the composite level. Moreover, output prices declined in both sectors by different degrees, while service providers faced significantly increased input costs.Notably, market optimism at the composite level fell to a record low.

“Across the board, the latest macroeconomic data have fallen short of market expectations. Insufficient effective domestic demand remains a prominent issue, with significant pressure on employment and weak optimism constraining people’s willingness and ability to spend.

“Meanwhile, a complex and severe external environment creates greater uncertainty for overseas demand. The economy grew 5% year-on-year in the first half of this year, and the recovery momentum in the third quarter was weak, making it challenging to achieve the annual growth target.

“On the policy front, measures currently in the works should be sped up to take effect sooner, while the need for additional policies has only grown more urgent. Currently, there is relatively sufficient policy space. Fiscal and monetary policies should play a greater role in safeguarding people’s livelihoods, improving the job market and stimulating demand.”

China’s official services PMI is weaker than Caixin’s as Ed Yardeni illustrates. This is weak!

ASEAN manufacturing output dips into contraction for the first time in three years

The headline S&P Global ASEAN Manufacturing Purchasing Managers’ Index™ (PMI®) slipped to 50.5 in September, from 51.1 in August. While posting above the neutral 50.0 threshold for a ninth straight month, the latest reading signalled only a fractional improvement in ASEAN manufacturing operating conditions, and one that was the weakest since February.

The slowdown was largely owed to cooling underlying demand trends. Growth in new orders eased, with the latest uptick the softest recorded in seven months. The upturn was hindered by consistently underperforming trade volumes, which have been declining since June 2022. Moreover, the latest drop in new export sales was sharp and the most marked in over three years.

Weaker demand trends led to a fresh decline in output, with ASEAN goods producers experiencing their first drop in three years. However, the overall rate of contraction was minimal. Whilst manufacturers continued to increase their purchasing, the rate of growth also softened from August and was only mild.

More positively, a fresh rise in payroll numbers was noted in September. Months of improving sales volumes supported the modest rise in employment, which was also the joint-strongest (along with February’s reading) in two years.

The rate of input price inflation cooled since August, with cost burdens rising at the weakest pace in 13 months. The rate of charge inflation also softened and was marginal overall.

Lastly, confidence in the outlook for output registered an improvement, with optimism reaching its highest level since the start of the year. ASEAN manufacturers are hopeful that output will grow over the next 12 months.

China’s Housing Glut Collides With Its Shrinking Population Many cities are stuck with empty homes that they will likely never fill, adding to the country’s economic woes

The country could have as many as 90 million empty housing units, according to a tally of economists’ estimates. Assuming three people per household, that’s enough for the entire population of Brazil.

Filling those homes would be hard enough even if China’s population were growing, but it’s not. Because of the country’s one-child policy, it is expected to fall by 204 million people over the next 30 years.

“Fundamentally, there are not enough people to fill the homes,” said Tianlei Huang, a research fellow at the Peterson Institute for International Economics.

Some unused real estate will be bought up and lived in, especially if more government support—which economists have been calling for—convinces Chinese buyers that values will rise again. Big cities like Beijing, Shanghai and Shenzhen will almost certainly absorb their excess housing, given their dynamic economies and migrant inflows, which have helped keep their populations growing.

The problem is much harder to solve in smaller cities, which often have weaker economic prospects and declining populations. In China, researchers informally group cities into tiers, and many of the nearly 340 cities classified as third-, fourth- and fifth-tier—with populations from few hundred thousand to several million people—are struggling economically.

At least 60% of China’s third-, fourth- and fifth-tier cities saw their populations shrink from 2020 to 2023, according to Wall Street Journal calculations based on official data.

Those cities have more than 60% of China’s housing inventory, according to Harvard economics professor Kenneth Rogoff. Many encouraged developers to build more—even when their populations were falling—because land sales and construction boosted economic growth and fattened local governments’ wallets. (…)

Many will become long-term burdens to cities and investors who get saddled with assets they can’t sell and which have lost their value, yet still must be maintained. Some will just wither away, economists say. (…)

In such places, “it is very hard to maintain law and order, even probably in China,” he said. “I think it’s going to be a big social and governance problem in the future.” (…)

Of the up to 90 million units that are unoccupied, as many as 31 million were fully or partially built but never sold. Such properties could be bulldozed, but many are tied up in litigation related to developers’ bankruptcies. In many cases, cities and developers hope to finish them.

Another 50 to 60 million units were bought but remain empty. (…)

Approximately 74% of Chinese households in first- and second-tier cities owned more than one home across China, while nearly 20% owned three homes or more, according to a recent survey by Citi Research.

These homes are potentially more difficult to deal with because their owners still hope for appreciation. Many are in partially occupied buildings that can’t be torn down.

An additional 20 million units were sold but were left largely unbuilt by developers due to cash-flow problems and poor market conditions. The owners still want them, but developers don’t have money to finish them. (…)

In China, many owners of empty properties are likely to keep maintaining their units, since management fees in China are low and property taxes are only levied in special cases. Tough personal-bankruptcy rules in China make it hard to walk away from properties, and many want to hang on to them for a possible market rebound.

Still, some economists fear a negative spiral in which declining home prices spur more owners to try to unload empty units, depressing values for everyone. (…)

Property prices in most cities have returned to 2017 and 2018 levels, said Yi Wang, head of China real-estate research at Goldman Sachs. If prices drop to 2015 levels, many more owners might choose to sell unoccupied properties. That’s because 2015 was the beginning of the last boom, and owners who bought early won’t want to see their units’ values fall below what they paid, Wang said.

That might be inevitable, though, given China’s falling population.

“I don’t think the housing oversupply problem has a solution, really,” said Huang, of the Peterson Institute. “Fundamentally, it’s the problem of declining demographics. Ghost cities will remain ghostly.”