Output growth hits 16-month low as confidence slumps and selling prices rise at increased rate
The headline S&P Global US PMI Composite Output Index fell from 53.5 in March to 51.2 in April, according to the preliminary ‘flash’ reading (based on approximately 85% of usual survey responses). The fall in the index signals a deceleration of activity growth to a 16-month low from the three-month high seen in March.
Growth of service sector business activity slowed sharply to only a modest pace, registering the second-weakest expansion recorded over the past year, in response to slower order book growth.
New business inflows in the services sector showed the second-smallest gain recorded over the past 11 months, often linked by survey respondents to uncertainty surrounding the economy and tariffs. Demand growth was subdued in particular by a fall in exports of services (which include tourism-related activities as well as cross-border activities by service providers) on a scale not seen since January 2023.
Manufacturing output meanwhile edged back into growth after slipping into decline in March, though the expansion was only marginal.
Whilst new orders placed at factories rose at a slightly increased rate, linked to higher domestic orders, the increase was only modest and curbed by a marked fall in export orders. While tariffs had in some instances reportedly helped drive new sales to domestic customers, trade policy was widely linked to falling foreign sales.
Sentiment among companies about their output over the coming year fell for a third successive month, dropping sharply to register the least optimistic outlook since July 2022. The latest reading was the joint-second lowest since September 2020, surpassed only by October 2022.
Sentiment about the future was relatively more resilient in manufacturing than services, as factories often reported hopes of positive impacts from government policies such as recent trade protectionism measures. Factory confidence nonetheless fell to its lowest since last August amid concerns over higher costs, supply constraints, weaker economic growth, and falling demand from export customers.
Service sector optimism also cooled, sliding further from December’s one-and-a-half year high to its lowest since October 2022. April saw growing numbers of companies cite concerns over government policies and the resulting economic uncertainty.
As with manufacturing, the number of service providers expecting output to rise over the coming year continued to exceed those reporting a decline, though in both cases the resulting net degree of positive sentiment has fallen well below long-run averages to signal subdued confidence levels.
Employment rose slightly in April, up for the fourth time in the past five months, albeit registering a smaller gain than in March and a much-reduced rate of hiring compared to the strong 31-month high seen at the start of the year. Although a modest net increase in payroll numbers was recorded across the service sector in April, manufacturing jobs were cut for the first time since October.
Hiring was often restricted by concerns over the economic outlook and demand environments both at home and in export markets, with rising cost concerns and labor availability also cited as restricting factors.
Average prices charged for goods and services rose in April at the sharpest rate for 13 months, increasing especially steeply in manufacturing (where the rate of inflation hit a 29-month high) but also picking up further pace in services (where the rate of inflation struck a seven-month high).
Higher charges were attributed to rising costs, linked widely in turn to tariffs, rising import prices, and increased labor costs. Input costs in the manufacturing sector rose at a pace not seen since August 2022, as suppliers pushed through price hikes linked to tariffs, supply concerns and a weakened exchange rate. Service sector costs meanwhile rose at a slower rate than in March, though the increase was the second-largest recorded over the past six months as higher raw material prices were accompanied by upward wage pressures.
The S&P Global Flash US Manufacturing PMI edged up from 50.2 in March to 50.7 in April, remaining above the 50.0 no change level for a fourth month in a row, yet signaling only a marginal improvement in business conditions for a second consecutive month.
Factory production moved back into expansion territory after a brief decline in March, and new orders growth ticked higher from the modest gain signaled in March. Longer delivery times – which are typically associated with busier manufacturing supply chains – were also again reported, albeit to a slightly lesser degree than in March. However, employment fell for the first time since last October, acting as a drag on the headline PMI index. Inventories of inputs were unchanged.
Commenting on the flash PMI data, Chris Williamson, Chief Business Economist at S&P Global Market Intelligence said:
(…)
“Output rose in April at its slowest pace since December 2023, indicating that the US economy is growing at a modest annualized rate of just 1.0%. Manufacturing is broadly stagnating as any beneficial effect of tariffs are offset by heightened economic uncertainty, supply chain concerns and falling exports, while the services economy is slowing amid weakened demand growth, notably in terms of exports such as travel and tourism. (…)
This PMI survey smells stagflation in both manufacturing and services. Accelerating service inflation is surprising given the sharp decline in oil prices and slowing wages.
S&P Global does not have a China flash PMI but the FT previews the May 1 PMI report:
- Chinese factories slow production and send workers home as US tariffs bite Owners say American customers have cancelled or suspended orders
(…) In interviews with the Financial Times and via dozens of social media posts, workers shared pictures of quiet production lines or factory suspension notices, highlighting how the tariffs are starting to bite.
Workers said the trade war had prompted the suspension of production for a week or more at plants making products ranging from shoe soles to jeans, electrical outlets and portable stoves. Some factory owners said they were cutting overtime or weekend work. (…)
About 15 per cent of all Chinese exports last year went to the US.
Business Inflation Expectations Increased to 2.8 Percent
From the Atlanta Fed:
- Firms’ year-ahead inflation expectations increased by 0.3 percentage points to 2.8 percent, on average.
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How do your current sales levels compare with sales levels during what you consider to be “normal” times?
- How do your current profit margins compare with “normal” times?
Trump Meets His Match: The Markets
Since returning to Washington three months ago, Trump has toppled federal agencies, consolidated executive power, challenged global alliances and reconfigured America’s economic relationships around the globe. His moves have been met with protests, court challenges, dipping poll numbers and political opposition.
Yet so far, the only force that has reliably prompted him to back down is Wall Street. (…)
Both the president and White House officials argue that the sharp U-turns are all part of a long-term plan to force allies and adversaries alike to strike trade deals with the U.S. And they stress that Trump remains determined to follow through on his pledge to reset global trade.
But in each scenario, Trump was presented with evidence by his aides and cabinet secretaries, including Treasury Secretary Scott Bessent and Commerce Secretary Howard Lutnick, that holding firm on his decisions would spur further disarray in the markets, according to people familiar with the matter. Earlier this month, Trump acknowledged that he paused the tariffs in part because he watched the bond markets and people were getting a “little queasy.” (…)
Since Trump took office, the S&P 500 index is down roughly 10%, the index’s worst performance in the first 94 days of any presidential term on record, according to Dow Jones Market Data. The S&P’s data goes back to 1928. (…)
Shortly before he announced the 90-day pause on tariffs, Trump wrote on social media, “THIS IS A GREAT TIME TO BUY!!” After markets surged in response to the pause, Trump boasted that the financier Charles Schwab, his lunch guest at the White House, just made $2.5 billion off the news. (…)
Is This Trump’s Mitterrand Moment? The French President saved his government by giving up socialism. It’s a precedent for tariffs.
The WSJ Editorial Board:
President Trump continues to walk back his original tariff assault, and markets are pleased. They rose again Wednesday after Mr. Trump said he won’t fire the Federal Reserve Chairman and is likely to retreat from his highest China tariffs. Is this Mr. Trump’s François Mitterrand moment?
Readers of a certain age will recall how the French Socialist President swept into power in 1981 promising a far left agenda of government control over the private economy. The market reaction was brutal. Within a year he had put socialism on pause and by 1983 he had abandoned most of it. He went on to serve two terms.
That historic U-turn comes to mind as we watch Mr. Trump execute a reversal by stages in his tariff agenda. First he carved out space for Mexico and Canada from his reciprocal tariffs. Then he put his reciprocal tariffs on everyone except China on a 90-day pause. Then the Customs bureau gave exceptions to Apple, Nvidia and big electronics companies. Now comes word that Mr. Trump may substantially cut his 145% tariff rate on China.
That’s a long way in three weeks from the declarations by White House aide Peter Navarro and Commerce Secretary Howard Lutnick that there would be no tariff-rate changes. It’s hard to see this as anything other than a retreat amid the harsh reaction of financial markets, worries about recession and price increases, and a sharply negative reaction from the rest of the world—friend and foe.
The good news is that at least Mr. Trump is finally listening to reality. The CEOs of Walmart, Home Depot and Target paid a visit to the White House this week and told Mr. Trump prices would soon rise and store shelves might soon be empty as the tariff impact grows. This would be more than the “little disturbance” Mr. Trump warned about when he first unveiled his tariff barrage.
Financial markets have also had an impact, as they rise or fall based on the latest news about tariffs and Mr. Trump’s plans for Fed Chair Jerome Powell. There couldn’t have been a clearer market test in the last three weeks about the economic damage these columns warned about. The MAGA media echo chamber that praised Mr. Trump’s tariffs as strategic genius looks foolish.
Another harsh reality is that China called Mr. Trump’s bluff and seems to have won this round. (…)
Beijing has also warned countries not to do trade deals with the U.S. that exclude China—or else. With even U.S. allies facing Mr. Trump’s tariff assault, Beijing’s threat has resonated in a way that it never previously did. U.S. diplomatic sway is ebbing.
The question going forward is whether Mr. Trump is internalizing these economic and political lessons or merely pausing to fight his trade war another day. We doubt even Mr. Trump knows the answer, since so much of his decision-making is ad hoc. He’ll keep his universal 10% tariff in any case.
But if the President is looking for political advice, he could do worse than check out the polling cited nearby by Mark Penn and Andrew Stein. It shows that the public largely opposes his tariffs, whose damage poses the single biggest threat to his Presidency. Better to heed the polls and the verdict of Adam Smith, and take the Mitterrand path to political survival.
(…) There is much to debate over exactly how much the president conceded, but the key point as far as Mr. Market is concerned is that he’s shown that there is indeed a “Trump Put” — an option that allows investors to limit their losses if shares fall. The strike price is lower than had been hoped, but the key is that Trump has shown that when challenged, he blinks. (…)
Despite the relief at signs that they can bully the president, investors are still plainly unhappy, and the direction of travel for the market from here is not clear. That’s in large part because the U-turns could be more complete.
Trump wants tariffs on China to be “substantially lower,” but not negative, while Scott Bessent then assured everyone that the cuts won’t be unilateral. In other words, the administration wants to make a deal to reduce tariffs from their current absurd level, which we knew already. The shift in rhetorical tone is important; far more precision is needed before we can lift the uncertainty.
That’s problematic because uncertainty in itself inhibits economic activity and money-making. The Federal Reserve’s regular Beige Book, a collation of anecdotes and observations from the different branches’ contacts with business, illustrates the problem neatly. The latest, published Wednesday, is dominated by the uncertainty created by tariffs. Oxford Economics keeps this handy breakdown of the themes that dominate each edition. It speaks for itself:
While tariff uncertainty persists, the risk is that it will so inhibit businesses as to drive the economy into an unnecessary recession. Once that possibility can be ruled out, then a consistent market advance could happen.
(…) while the selloffs had forced the president to dial back the rhetoric, his most recent words run counter to his lofty long-term aims of remaking American society and the economy by changing the world. With decision-making evidently erratic, Shvets predicts “rolling chaos over years to come.”
If you can’t rely on a Trump Put with a fixed strike price, then predicting a change in policy requires knowledge of, first, the Kremlinology of who has the president’s ear at any one time (should we listen to Bessent? Navarro? who?), and, second, the state of the president’s mind.
Investors know virtually nothing about either. That shrouds future moves with uncertainty and effectively forces them to show more caution, or in more technical terms to demand greater risk premia and therefore lower prices. (…)
While financial markets got into risk management since mid-February and particularly since Liberation day, one can bet that the Trump administration will also gear up towards risk management seeing charts like this one:
Is there anyone still thinking there is a grand, well thought out plan behind all the announcements of the past 2 months?
They are not done yet:
US Officials Mull Easing Tariffs Targeting the Auto Industry
The Trump administration is considering whether to reduce certain tariffs targeting the auto industry that carmaker executives have warned would deal a severe blow to profits and jobs.
One measure would spare automobiles and parts already subject to tariffs from facing additional duties from levies on steel and aluminum imports, according to people familiar with the matter. That would eliminate so-called “stacking” of levies.
Another option being studied would fully exempt auto parts that comply with the US-Mexico-Canada trade pact, known as the USMCA, some of the people said. Those components don’t currently face tariffs, but the administration had planned to tax the non-US share of those parts from Canada and Mexico. Fully sparing those parts would abandon that approach, which would present a potentially herculean logistical challenge.
The Financial Times earlier reported that the Trump administration is considering reducing tariffs on auto parts — and that they might also exempt auto parts bought from China from a 20% tariff applied to the country over a dispute over fentanyl. (…)
If adopted, the changes would be a significant reprieve for automakers who have warned of devastating consequences from the Trump tariffs, including higher vehicle prices, production cuts and potential job losses. The industry relies on deeply integrated supply chains spanning North America for the vehicles they sell in the US. (…)
In the Oval Office on Wednesday, Trump was asked if he was considering changes to auto tariffs and indicated he was not — while also suggesting he might even increase levies on the Canadian auto sector.
“No, we’re not considering it now, but at some point it could go up,” Trump said. “Because, again, we don’t really want Canada to make cars for us. To put it bluntly, we want to make our own cars, and we’re now equipped to do that.” (…)
BTW: Trump to Mark 100 Days in Trip to Michigan Autoworker Heartland
(…) “Remember, there’s no tariff when they build their plants here — and everybody wants to,” Trump told reporters in the Oval Office on Wednesday. “The higher the tariffs go, the more likely it is they come in and build a plant.” (…)
China Says US Should Revoke All Unilateral Tariffs, Denies Talks
(…) He also dismissed speculation that progress has been made in bilateral communications, saying “any reports on development in talks are groundless,” and urging the US to “show sincerity” if it wants to make a deal.
The remarks suggest that President Donald Trump’s comments this week signaling that he could lower tariffs on China — which currently stand at 145% for most goods — will not be enough to de-escalate tensions. The US leader said Wednesday that “everything’s active” when asked if he was engaging with China and that Beijing was “going to do fine” once talks had settled. (…)
The remarks from China’s MOFCOM and MOD come hours after Pan Gongsheng, governor of the People’s Bank of China, warned of the threat ongoing frictions pose to trust in the global economic system.
“All parties should strengthen cooperation and make efforts to prevent the global economy from sliding into a track of ‘high friction, low trust,’” Pan said at a Group of 20 meeting in Washington on Wednesday, according to a social media post by state broadcaster China Central Television. (…)
Pipeline to China
John Mauldin shows a chart revealing that China has been buying a lot more crude oil from Canada than from the USA lately.
You might think this is because of tariffs, but it’s really about pipelines. An expansion of Canada’s Trans Mountain Pipeline opened last May, enabling Albertan oil to reach the Pacific Coast. This is a more direct route to China than the US Gulf Coast.
Tariffs aren’t helping, though. China has a way to replace some of the oil it previously sourced from the US, while Canada has a new market for its surplus oil. The bigger question may be how long it will last. With China aggressively switching to electric
vehicles and renewable energy, its oil demand seems to have peaked and may diminish over the next decade.
What John omits to mention is that the Trans Mountain pipeline is a new gateway to Asia for Canadian crude which, landlocked, could only be sold to the U.S.. While Canada’s heavy crude deserves a discount to lighter WTI, U.S. refiners have always exploited their unique position.
But new export capacity is helping close the differential, suggesting that U.S. future crude costs will rise by $3-5/bbl.
Canada’s natural gas is in a similar position but the Canadian government is actively exploring ways to build east-west pipeline capacity to broaden export markets and reduce dependence on the U.S..
All these will contribute to a rising U.S. trade deficit with Canada…
Canadian grades represent approximately 70pc of the US midcontinent refinery feedstock.
EARNINGS WATCH
The Dollar’s Slide Is Raising Red Flags for Corporate Earnings
Rising tariffs and the weakening dollar are casting a shadow on companies’ profit guidance this earnings season, with more damage seen unfolding over the coming quarters.
Companies across Europe are already sounding the alarm following the dollar’s slide to three-year lows versus the euro and to a 10-year trough against the Swiss franc. (…)
Given that Stoxx 600 index members get 60% of their sales from overseas, such a large dollar slide is unwelcome, as it would sharply reduce the worth of US earnings once converted back into local European currencies. As a result, US-exposed stocks in the region are falling with the dollar and many investors are turning to domestically-geared firms as an alternative. (…)
“European companies will have to wake up to the idea that their price competitiveness can no longer rely on a stronger US dollar,” said Florian Ielpo, head of macro research at Lombard Odier Investment Managers.
While the current earnings season won’t capture the effect of tariffs unveiled on April 2, “the third quarter will be the eye of the storm,” Ielpo predicted. (…)
Each 5% rally in the euro and other local currencies against the dollar shaves 1.5 to two percentage points off earnings growth in the MSCI Europe gauge, Morgan Stanley strategists estimate, describing the currency moves as “a broad-based drag.” (…)
For American companies that sell abroad, dollar weakness can be a boon — shares in companies that make most of their sales outside the US, such as Coca Cola Co. and Philip Morris International Inc., have bucked this month’s stock-market rout.
Yet, only a third of revenue for S&P 500 constituents comes from overseas. For the remaining, domestic-focused companies, such as retailers, a falling greenback is usually bad news, because it raises prices for imports and erodes consumers’ purchasing power, UBS Group AG strategists note. (…)
As economic gloom deepens, strategists are cutting their earnings estimates for the year. As for the S&P 500, earnings-per-share growth is seen as 7.3%, down from 11.4% at the start of the year, data compiled by Bloomberg Intelligence shows. Meanwhile Europe’s Stoxx 600 earnings growth estimates have been cut to minus 2% from 3% in January, according to Barclays Plc strategists. (…)
The FT informs us that “While fewer than a fifth of the blue-chip stocks in the S&P 500 index had held first-quarter earnings calls by Tuesday, tariffs were cited on more than 90 per cent of them, according to FactSet. The term “recession” was mentioned on 44 per cent of calls, compared with less than 3 per cent on those covering the fourth quarter of 2024.”
The FT lists several companies quantifying the costs of Trump’s policies on their businesses.: GE Vernova: $400M, Baker Hughes: $200M, Boston Scientific: $200M, J&J: $400M, RTX: $850M, GE Aerospace: $500M. That’s $2.6B on only 6 companies. “A little disturbance” he said.
Five-Minute EV Charging Is Here, but Not for U.S.-Made Cars CATL’s and BYD’s rapid-charging technologies underscore China’s dominance in the EV sector, a technological priority for Xi Jinping
Two of the world’s leading battery developers are locked in a technological race that has brought the charging time for an electric vehicle to just five minutes—about the amount of time it takes to refuel a traditional gasoline-powered car.
And, in a twist with geopolitical ramifications, both of the technological leaders are Chinese. It is a show of prowess that underscores just how far China has extended its global dominance over next-generation technologies, in some cases leaving the U.S. years behind.
The claimed leap forward on EV batteries is merely the latest technological feat for a country that has stunned Western governments with a string of breakthroughs on artificial intelligence, semiconductors and EVs—a vindication of leader Xi Jinping’s ambitions of turning China into a global technological powerhouse. (…)
The technologies won’t be introduced on a wide scale right away. The batteries can only be charged at a network of superfast charging stations that is still being built out.
Still, CATL’s and BYD’s technologies serve as the latest example of how China is years ahead of the U.S. in EV technology, even as the Trump administration intensifies efforts to curtail Chinese companies’ access to cutting-edge technology. (…)
CATL is now responsible for making more than one-third of the EV batteries on the global market, including those inside made-in-China Teslas.
CATL and BYD’s claimed technological advancements are unlikely to benefit American consumers, at least in the near term, given sky-high tariffs levied by the U.S. against Chinese goods—and in particular EVs manufactured in China. (…)
In March, 52% of passenger cars sold in the country were battery-electric vehicles, plug-in hybrids or range-extended vehicles, according to the China Passenger Car Association. (…)
Chinese battery makers are leading producers of lithium-iron-phosphate, or LFP, batteries. These iron-based battery cells cost less than the nickel-and-cobalt combination used widely in North America and Europe.
CATL’s newest fast-charging battery, the second generation of its Shenxing lineup, is an LFP battery with a range of about 500 miles. CATL said it improved electron transmission efficiency to avoid overheating during rapid charging. (…)
China has more than 13 million EV-charging facilities nationwide, counting both publicly and privately operated ones, state media has reported. The U.S. has around 77,300 charging locations with about 230,000 EV-charging points in total, data from the Joint Office of Energy and Transportation showed. It is unclear if the two figures are directly comparable, but industry experts widely regard China’s EV-charging environment to be far ahead of the U.S.’s.
Separately on Monday, CATL introduced a new sodium-ion battery that it calls Naxtra. At the moment, mainstream EV batteries are reliant on lithium, creating a potential bottleneck around supplies of the material. CATL says sodium-ion batteries, if mass-produced, could help reduce its dependence on lithium.
Sodium-ion batteries are made from a sodium compound called soda ash, which can be produced using table salt. Unlike lithium, sodium is easily accessible everywhere. The U.S. has also been working on developing this technology.
- Tesla Sales Slumped Again in EU Last Month Decline stands in contrast with a 17% increase in registrations for battery-electric vehicles
(…) New-car registrations for Tesla models, a reflection of sales, logged a 36% slump in March to 18,224 vehicles, according to the European Automobile Manufacturers’ Association, an industry body. The March contraction came after Tesla recorded a 47% slump in February registrations and a 50% drop in January.
Tesla’s latest decline stands in contrast with a 17% increase in overall registrations for battery-electric vehicles across the EU in March, 24% growth for hybrid-electric cars and 12% growth for plug-in-hybrid models. (…)
Trump Says Millionaire Tax Would Push Wealthy to Leave the US
(…) “I think it would be very disruptive because the millionaires would leave the country,” Trump told reporters in the Oval Office on Wednesday. “Other countries that have done it have lost a lot of people. They lose their wealthy people. That will be bad because the wealthy people pay the tax.” (…)
How about this disruption?
75% of US scientists who answered Nature poll consider leaving More than 1,600 readers answered our poll; many said they were looking for jobs in Europe and Canada.
More than 1,200 scientists who responded to a Nature poll — three-quarters of the total respondents — are considering leaving the United States following the disruptions prompted by Trump. Europe and Canada were among the top choices for relocation.