While the global economy has expanded modestly, many markets continue to soften. The J.P. Morgan Global Manufacturing PMI edged down 53.0 in June to 52.7 in July, the lowest level in 12 months. The headline data have trended slightly lower since reaching nearly a seven-year high in December (54.5), but the data remain encouraging overall, reflecting progress over the past few years. Two of the top 20 markets for U.S.-manufactured good contracted in July, down from three in June. As anticipated, Brazil stabilized in the latest data after slipping into contraction in June for the first time since March 2017 due to a truckers’ strike. At the same time, Hong Kong and South Korea remained challenged, with the latter continuing to grapple with recent political and economic challenges. Overall, among the top 20 export markets, manufacturing activity softened in 13 countries, with improvements seen in five nations and one other being unchanged in July. There is no manufacturing PMI for comparison purposes for Belgium, which is our 12th-largest trading partner.
The emerging markets have garnered a lot of attention recently because of the financial crisis in Turkey and fears that this might lead to a contagion in other markets with high levels of debt. One U.S. dollar purchased 4.9098 Turkish lira on July 31, and on August 13, it reached an all-time high of 6.8590, a depreciation in their currency of nearly 40 percent. It has improved somewhat since then. Of course, Turkey was struggling even before the currency challenges. The IHS Markit Turkey Manufacturing PMI improved from 46.8 in June to 49.0 in July but contracted for the fourth consecutive month on falling demand and production. As recently as January, that measure was a decent 55.7. Overall, the emerging markets have expanded modestly of late, weakening from earlier in the year and weighed down by softer global growth and a strong U.S. dollar. The IHS Markit Emerging Markets Manufacturing Index edged down from 51.2 in June to 51.0 in July, a one-year low.
Among other things, this measure has been pulled lower by slower growth in China. The Caixin China General Manufacturing PMI declined from 51.0 in June to 50.8 in July, its lowest level since November. Moreover, real GDP rose 6.7 percent year-over-year in the second quarter, down from 6.8 percent in the first quarter and its slowest pace since the third quarter of 2016. Other measures also reflect decelerated growth, especially as China deals with trade tensions with the United States. Chinese industrial production grew 6.0 percent year-over-year in July, the same rate as in June but down from 6.8 percent in May. Likewise, fixed asset investment has grown 5.5 percent over the past 12 months, down from 6.0 percent year-over-year in June and the weakest pace of growth since the series began in 1996. Retail sales were also slower, up 8.8 percent year-over-year in July. That figure was 10.2 percent year-over-year in November.
Despite some headwinds for manufacturers, exports have started 2018 on a positive note, extending the nice rebound in 2017. According to seasonally-adjusted data from TradeStats Express, U.S.-manufactured goods exports totaled $700.11 billion in the first half of 2018, up a robust 7.4 percent from the same time period in 2017. If this trend continues, we are on pace for $1.40 trillion in U.S.-manufactured goods exports for the full year of 2018, which would be the best year since 2014, which was an all-time high. More importantly, through the first six months of this year, U.S.-manufactured goods to our top-six trading partners also improved year to date relative to last year. Meanwhile, the U.S. dollar has trended higher in general since January 25, up 7.7 percent against major currencies over that timeframe.The stronger dollar could hamper manufacturing export growth moving forward, as it makes goods more expensive overseas. To date, it appears to have not, but it is worth watching.
Talks to conclude the North American Free Trade Agreement (NAFTA) resumed in July and are focused on a possible deal by the end of August. The United States and China took additional steps to increase tariffs later this month, with potentially hundreds of millions of additional trade that may be impacted. The U.S. national security investigation into imports of automobiles and automotive parts is continuing with significant testimony in opposition to new tariffs. The president signed new legislation modernizing investment reviews and U.S. export controls, and also began new talks with the European Union (EU) on a range of trade issues.
Chad Moutray, Ph.D., CBE Chief Economist National Association of Manufacturers
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