Global Manufacturing Economic Update

The International Monetary Fund (IMF) released the latest World Economic Outlook, projecting 3.7 percent growth in the global economy in both 2018 and 2019 and matching the pace seen in 2017. This is down slightly from an estimate of 3.9 percent global GDP growth in its April report, primarily based on trade policy uncertainties and softness in developing economies. According to the authors, those challenges will continue to provide downside risks to the outlook moving forward. In addition, higher interest rates and a strong U.S. dollar could also pose significant concerns to the outlook in some economies, especially in the emerging markets. For its part, the IMF sees the United States expanding by 2.9 percent and 2.5 percent in 2018 and 2019, respectively.

Speaking of the U.S. dollar, it has trended higher in general since Jan. 25, up 7.2 percent. The trade-weighted U.S. dollar index against major currencies from the Federal Reserve Board has risen from 84.6338 on Jan. 25—the lowest level since December 18, 2014—to 90.6888 on Oct. 5. This index reflects currency units per U.S. dollar, suggesting that the dollar can purchase somewhat more today than it could on Jan. 25. The index registered 75.7513 on June 30, 2014, illustrating the dollar’s continued strength, up 19.8 percent since then. The stronger dollar could hamper manufacturing export growth, as it makes goods more expensive overseas. To date, it appears to have not (see below), but it is worth watching.

Against that backdrop, there are signs that the global economy continued to soften in September, with the J.P. Morgan Global Manufacturing PMI declining to a 22-month low. Demand, production and hiring were lower, with exports slipping into contraction territory globally for the first time since June 2016. At the same time, raw material costs remain highly elevated despite some easing in the past couple of months—a trend that mirrors other measures of inflation, both in the United States and elsewhere.

There was also some slippage in economic growth when looking at the top 20 markets for U.S.-manufactured goods. In June, all those markets were in expansion, but the global economy has softened since then. In September, there were two economies in contraction—Hong Kong and Singapore—and two markets that were neutral—China and Italy. The two contracting nations have been weakened by decelerating activity in China, with Singapore in negative territory for the first time since April 2016. More encouragingly, South Korea expanded in September, ending six straight months of contraction. These data are a sign that South Korea is beginning to emerge from economic and political challenges.

Nonetheless, exports have been strong year-to-date in 2018, extending the nice rebound seen in 2017. U.S.-manufactured goods exports totaled $770.20 billion through the first eight months of 2018 using non-seasonally adjusted data, jumping 6.65 percent from the year-to-date total of $722.14 billion in 2017. In addition, U.S.-manufactured goods to our top-six trading partners also improved year to date this year relative to last year. Meanwhile, the U.S. trade deficit rose to $53.24 billion in August, the highest since February’s nine-and-a-half-year high ($54.96 billion). On the positive side, the service-sector trade surplus accelerated to $23.51 billion in August, a new record.

Just over a year after negotiations to modernize the North American Free Trade Agreement (NAFTA) began, the United States, Canada and Mexico reached agreement on an updated agreement, which is expected to be signed at the end of November. U.S-China commercial relations continue to be under stress, with the United States imposing tariffs on $250 billion in imports from China while China is imposing tariffs on $105 billion in imports from the United States. Following the president’s signature on a new Miscellaneous Tariff Bill (MTB), normal tariffs (excluding Section 301 and other special tariff measures) will be suspended or reduced on nearly 1,700 products not made in the United States starting Oct. 13. The Senate has yet to move forward on the full slate of Export-Import (Ex-Im) Bank nominees. Congress is also considering various Russia sanctions legislation. The United States and Japan also announced new trade talks, while the administration released a new report on the defense industrial base.

Chad Moutray, Ph.D., CBE Chief Economist National Association of Manufacturers