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MANUFACTURING PMIs
USA: New orders decrease for first time in three months
The seasonally adjusted S&P Global US Manufacturing Purchasing Managers’ Index™ (PMI®) fell to 49.6 in July from 51.6 in June, below the 50.0 no-change mark for the first time in seven months and signaling a slight deterioration in the health of the manufacturing sector.
Central to the worsening of overall business conditions was a first reduction in new orders for three months. New business decreased solidly, and at the fastest pace in 2024 so far. Firms reported a general slowdown in market demand, with clients often reluctant to commit to new projects at the current time. New export orders also decreased, albeit to a lesser extent than total new business. A number of respondents highlighted demand weakness in Canada.
Manufacturing production continued to rise in July, although the drop in new orders meant that the rate of expansion eased to a marginal pace that was the slowest in the current six-month sequence of growth.
Continued increases in production at a time of falling new orders meant that firms were able to work through outstanding business again in July. The rate of depletion in backlogs of work was solid and the fastest in three months. Rises in output also contributed to an increase in stocks of finished goods as some firms looked to build inventories in anticipation of future demand improvements. That said, the drop in sales was also a factor behind rising stock levels.
In act, the accumulation of post-production inventories was the strongest since November 2022 and among the fastest since the series began in May 2007.
Confidence in the future path of production also supported job creation in July, while some firms hired staff to replace previously departed workers. Employment increased for the seventh month running, but at the softest pace since January.
The positive outlook was evident in data on business sentiment, which showed optimism regaining some ground at the start of the third quarter. Hopes that the current soft patch in demand will prove temporary, with new business improving following the Presidential Election, supported confidence in the outlook for production.
Input costs increased markedly in July amid reports of higher prices for energy, freight, labor and raw materials. That said, the rate of inflation eased to a four-month low.
Meanwhile, manufacturers increased their own selling prices at only a marginal pace, with the rate of inflation easing to a one-year low as firms restricted price rises in an attempt to secure sales in a competitive market.
Purchasing activity decreased for the second month running, with firms reluctant to purchase additional inputs given falling new orders and rising prices. The modest drop in purchasing fed through to a further reduction in stocks of inputs, the fifth in as many months.
Reduced demand for inputs led some suppliers to speed up deliveries, but this was cancelled out by shortages of staff and materials, plus shipping delays. Supplier performance was therefore broadly unchanged in July.
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The ISM:
The Manufacturing PMI® registered 46.8 percent in July, down 1.7 percentage points from the 48.5 percent recorded in June. The New Orders Index remained in contraction territory, registering 47.4 percent, 1.9 percentage points lower than the 49.3 percent recorded in June. The July reading of the Production Index (45.9 percent) is 2.6 percentage points lower than June’s figure of 48.5 percent.
The Prices Index registered 52.9 percent, up 0.8 percentage point compared to the reading of 52.1 percent in June. The Backlog of Orders Index registered 41.7 percent, equaling its June reading. The Employment Index registered 43.4 percent, down 5.9 percentage points from June’s figure of 49.3 percent. (…)
The New Export Orders Index reading of 49 percent is 0.2 percentage point higher than the 48.8 percent registered in June. The Imports Index remained in contraction territory in July, registering 48.6 percent, 0.1 percentage point higher than the 48.5 percent reported in June.”
U.S. manufacturing activity entered deeper into contraction. Demand was weak again, output declined, and inputs stayed generally accommodative. Demand slowing was reflected by the (1) New Orders Index dropping further into contraction, (2) New Export Orders Index continuing in contraction, (3) Backlog of Orders Index remaining in strong contraction territory, and (4) Customers’ Inventories Index moving lower to the higher end of ‘too low’.
Output (measured by the Production and Employment indexes) declined compared to June, with a combined 8.5-percentage point downward impact on the Manufacturing PMI calculation. Panelists’ companies reduced production levels month over month as head-count reductions continued in July. Inputs — defined as supplier deliveries, inventories, prices and imports — generally continued to accommodate future demand growth.
Demand remains subdued, as companies show an unwillingness to invest in capital and inventory due to current federal monetary policy and other conditions. Production execution was down compared to June, likely adding to revenue declines, putting additional pressure on profitability. Suppliers continue to have capacity, with lead times improving and shortages not as severe.
Eighty-six percent of manufacturing gross domestic product (GDP) contracted in July, up from 62 percent in June. More concerning: The share of sector GDP registering a composite PMI® calculation at or below 45 percent (a good barometer of overall manufacturing weakness) was 53 percent in July, 39 percentage points higher than the 14 percent reported in June. Notably, all six of the largest manufacturing industries — Machinery; Transportation Equipment; Fabricated Metal Products; Food, Beverage & Tobacco Products; Chemical Products; and Computer & Electronic Products — contracted in July.
The five manufacturing industries reporting growth in July are: Printing & Related Support Activities; Petroleum & Coal Products; Miscellaneous Manufacturing; Furniture & Related Products; and Nonmetallic Mineral Products. The 11 industries reporting contraction in July — in the following order — are: Primary Metals; Plastics & Rubber Products; Machinery; Electrical Equipment, Appliances & Components; Transportation Equipment; Fabricated Metal Products; Food, Beverage & Tobacco Products; Wood Products; Paper Products; Chemical Products; and Computer & Electronic Products.
Eurozone factory output contracts at strongest rate in 2024 so far
The HCOB Eurozone Manufacturing PMI, a measure of the overall health of eurozone factories and compiled by S&P Global, matched that seen in June, recording 45.8 once again in July. Subsequently, this represented a further marked deterioration in the health of the euro area’s goods-producing economy.
Albeit unchanged on the month, most of the eight monitored eurozone nations saw Manufacturing PMI figures decrease when compared to June. Germany and France, the currency bloc’s two largest economies, saw their respective index values drop to three- and six-month lows, respectively. Greece and Spain, which have been the two strongest performers in 2024 so far, also lost growth momentum. Italy and Ireland were the only two countries covered by the survey to see their Manufacturing PMI increase.
For the eurozone as a whole, July survey data indicated a slight acceleration in the factory order downturn that has been ongoing since May 2022. Overall, the pace of contraction was the quickest in three months. Cross-border sales activity also weighed on demand for eurozone goods at the start of the third quarter, as evidenced by another solid reduction in new orders from export markets*.
To compensate for lower workloads, eurozone manufacturers leaned more heavily on their backlogs as a means to support production. Outstanding business volumes were depleted at a sharp and quicker rate in July. In fact, the pace of depletion was the fastest since February. Nevertheless, production levels suffered the most marked contraction in the year-to-date.
Net factory employment fell at the start of the third quarter, with workforce numbers decreasing at the fastest pace since last December. This stretched the current sequence of job shedding to 14 months. Lower staffing capacity coincided with a drop in business confidence, the first time since October last year this has been the case. Overall, expectations for output in the coming year slipped to a four-month low.
Eurozone manufacturers trimmed their purchasing activity in July, albeit to a slightly softer extent than in June. Still, the rate of decline was sharp. In turn, pre-production inventories were reduced for the eighteenth month in a row. The latest survey data signalled a further improvement in supplier performance, but the extent to which delivery times shortened was the weakest in six months.
Lastly, HCOB PMI data revealed another monthly increase in eurozone manufacturers’ operating costs. The rate of input price inflation quickened to a one-and-a-half-year high, but remained below the long-run trend. Charges for goods leaving the factory gate were broadly unchanged since June, indicating that firms refrained from passing on higher cost burdens to their clients.
CHINA: Operating conditions deteriorate amid a renewed fall in new orders
The headline seasonally adjusted Purchasing Managers’ Index™ (PMI®) fell to 49.8 in July, down from 51.8 in June. Easing below the 50.0 neutral mark, the latest data signalled that conditions in the manufacturing sector deteriorated for the first time in nine
months, albeit only marginally.
Manufacturing output expansion was the slowest in the nine-month sequence during July, attributed to the first fall in new orders for a year. According to panellists, subdued demand conditions and reductions in client budgets underpinned the latest fall in new work. Export orders meanwhile continued to rise, but the rate of growth slowed from June to a modest pace.
Sub-sector data revealed that reductions in new orders mainly unfolded in the investment and intermediate goods segments while the consumer goods sector expanded slightly in July. (…)
Employment levels remained relatively stable, falling only fractionally in July. While some firms added headcounts to cope with ongoing workloads, others opted to reduce staffing levels, anticipating lower production needs as new orders fell.
Turning to prices, average selling prices declined for the first time since May. Chinese manufacturers indicated reducing selling prices to support sales amid Increased competition. This was partially supported by input cost inflation easing to the lowest in the current four-month sequence.
Renewed contraction in Japan’s manufacturing sector
The headline au Jibun Bank Japan Manufacturing Purchasing Managers’ Index™ (PMI®) fell from the neutral 50.0 mark in June to 49.1 in July to signal a deterioration in the health of the sector for the first time since April. The reduction was modest, yet the strongest seen for four months.
There was a sustained contraction in new orders at the start of the third quarter of 2024. The pace of decline quickened from June, and was the sharpest for four months. According to panellists, demand from both domestic and international markets was subdued.
Also contributing to the sub-50.0 PMI reading was a renewed contraction in output levels in July. The downturn reportedly reflected production adjustments in response to weaker demand, though was only fractional overall. Muted customer demand allowed firms to work through existing orders, as signalled by a stronger fall in backlogs of work. Moreover, the rate of depletion was the fastest since March and sharp overall.
Firms often indicated they kept on top of capacity requirements to complete outstanding business, as indicated by a fifth consecutive increase in employment levels.
On the prices front, input cost pressures intensified in the latest survey period. Average cost burdens rose at a marked rate that was the strongest since April 2023. Higher operating expenses were often attributed to increased labour, logistics, oil and raw material
prices. Output price inflation meanwhile remained steep but eased to a four-month low as firms attempted to remain competitive. (…)
Powell means September, whatever he doesn’t say
(…) Powell did this by saying that “the sense of the committee is closer to cuts but we’re not there yet,” by freely conceding that “downside risks to the labor market are real,” while adding that employment is “not a source of material inflationary pressure,” by calling policy “restrictive, not extremely restrictive but restrictive,” and by cheerfully describing the latest inflation data as “so much better” than 12 months ago. A cut will happen at the next meeting if inflation moves down “in line with expectations,” which is a way of saying that we should expect a cut. (…)
The greatest risk confronting the Fed now would be an unpleasant surprise Friday from the payrolls data for July. Powell made clear that unemployment was now as much of a concern as inflation, but also said that the jobs market was merely “normalizing” rather than moving steadily toward a recession. (…)
Business Confidence for Small and Large Firms
Since the Fed started raising rates, business confidence has diverged for small and large companies.
The source of the divergence is likely higher costs of capital for small companies that have higher leverage and lower coverage ratios, and lack access to broadly syndicated loan markets and private credit.
In other words, the transmission mechanism of tighter monetary policy mainly works through smaller companies that are harder hit by Fed hikes and don’t benefit from tighter credit spreads and higher stock prices.
