NAM’s Dr. Chad Moutray: Global economic and trade trends
The global economy continues to grow ever-so-modestly even as it remains quite challenged.
The J.P. Morgan Global Manufacturing PMI edged slightly higher, up from 50.7 in December to 50.9 in January. The underlying data were mixed, with the pace of new orders picking up (from 50.8 to 51.4), but employment growth slowing (down from 50.6 to 50.4). Output (unchanged at 51.5) and exports (unchanged at 50.4) were both positive, but flat for the month. It should be noted that one-quarter of the weighting of the global index comes from the United States (up from 51.2 to 52.4), where manufacturing activity rebounded at the start of the new year after falling to a three-year low in December. Interestingly, this differs from the competing survey from the Institute for Supply Management, which showed contraction in January for the fourth-straight month.
The storyline has not changed much in 2016 from what was seen in 2015 for the top 15 markets for U.S.–manufactured goods. Many of the countries experiencing contractions in January have done so for much of the past year. This includes Brazil (up from 45.6 to 47.4), Canada (up from 47.5 to 49.3), China (up from 48.2 to 48.4), Hong Kong (down from 46.4 to 46.1), Singapore (down from 49.7 to 49.3) and South Korea (down from 50.7 to 49.5). The latter returned to negative territory, where it has contracted in nine of the past 10 months. On the other hand, several of these nations experienced some stabilization in their rates of decline in January, including Brazil, which had its highest PMI level in 11 months.
The U.S. dollar remained strong, with crude oil prices plummeting. The trade-weighted U.S. dollar index against major currencies from the Federal Reserve Board has risen from 75.70 on July 1, 2014, to 93.42 on February 5, 2016, a 23.4 percent increase. (The data are revised each Monday.) This index reflects currency units per U.S. dollar, suggesting that the dollar can now purchase more than it could before and vice versa. For manufacturers, growth in the dollar’s value presents a real challenge as firms seek to increase international demand. With that said, the dollar weakened a little since late January, with the index measuring 95.5871 on January 29, on changing views of when the Federal Reserve might raise short-term rates again.
Meanwhile, the price of petroleum fell to levels not seen since 2003, the result of a strong U.S. dollar and weaknesses in the global economy, particularly in China. The price of West Texas Intermediate crude oil briefly closed just below $28 on February 9. To put this in a larger context, the current price is off more than 70 percent since its recent peak of $107.95 per barrel on June 20, 2014. Moreover, the average price of regular conventional gasoline in the U.S. fell to $1.66 per gallon on February 8, its lowest level since December 29, 2008, according to the Energy Information Administration.
Chinese growth remains a significant concern. The Caixin China General Manufacturing PMI increased from 48.2 to 48.4, contracting for the 13th time in the past 14 months. On the positive side, the rate of decline for new orders (up from 47.7 to 48.5) slowed somewhat. Yet, other measures were generally lower for the month, including output (down from 48.7 to 48.0), exports (down from 47.8 to 47.1) and employment (down from 47.3 to 47.0). Similarly, the official manufacturing PMI release (down from 49.7 to 49.4) from the National Bureau of Statistics of China also indicated notable weakness, and it was the lowest level since August 2012. The declines were mostly for small and medium-sized enterprises.
The Chinese economy grew 6.8 percent year-over-year in the fourth quarter, slowing from 6.9 percent in the third quarter. For the year as a whole, China said that real GDP rose 6.9 percent. Yet, these numbers were viewed with suspicion, as many analysts assume that China is expanding much slower than that. In 2015, industrial profits fell 2.3 percent. Overall, activity continues to decelerate significantly. This includes industrial production, which has declined from 7.9 percent year-over-year growth in December 2014 to 5.9 percent in December 2015. A similar story exists for fixed asset investment (down from 15.7 percent to 10.0 percent) and retail sales (down from 11.9 percent to 11.1 percent); although, consumer spending has held up better than other indicators.
The slowdown in China has prompted global contagion worries—a major source of recent financial market volatility. As a result, I would not be surprised if the Bank of China continues to seek stimulative moves in an attempt to spur more growth. Using the official estimates, my outlook is for 6.4 percent year-over-year growth in China for 2016.
European growth has slowed somewhat, even as it continues to move in the right direction overall. The Markit Eurozone Manufacturing PMI decreased from 53.2 to 52.3, pulling back from its highest level since April 2014. Most of the key indicators eased for the month, including new orders (down from 54.2 to 53.0), output (down from 54.5 to 53.4) and exports (down from 53.2 to 52.3). Note that each of these measures continue to reflect somewhat modest expansions in activity even with some deceleration. At the same time, employment (up from 51.9 to 52.1) picked up a little, with hiring expanding for 17 straight months. On the negative side, input prices (down from 47.0 to 42.1) and output prices (down from 49.8 to 48.3) each slid further in January, echoing worries from the European Central Bank (ECB) about deflationary pressures in the economy.
The Eurozone PMI data closely mirror manufacturing activity in Germany (down from 53.2 to 52.3), including coincidently having the same PMI values. Demand and production pulled back in January in Germany but nonetheless expanded at a decent pace. Ireland (up from 54.2 to 54.3) and Spain (up from 53.0 to 55.4) also accelerated in their expansions in January, boosted by strong growth in new orders in each country. The data for other nations were more mixed, but with continuing modest growth overall. This included activity for Austria (up from 50.6 to 51.2), Italy(down from 55.6 to 53.2), the Netherlands (down from 53.4 to 52.4) and the United Kingdom (up from 52.1 to 52.9). In the U.K., production growth remained healthy (58.6), but the headline index was softer than desired due to still-weak demand and falling exports. Meanwhile, activity stagnated in both France (down from 51.4 to 50.0) and Greece (down from 50.2 to 50.0).
On February 12, we will get new data on fourth quarter GDP and industrial production for the Eurozone. The expectation is that real GDP will increase by 1.7 percent year-over-year in the fourth quarter, up slightly from the 1.6 percent pace seen in the third quarter. At the same time, the December industrial production data are not predicted to change much from the 1.1 percent year-over-year growth rate observed in November. In other news, retail sales were up 0.3 percent in December, rising 2.4 percent over the past 12 months, and the unemployment rate dropped to 10.4 percent, its lowest rate since September 2011. Finally, despite concerns about deflation (discussed above), the annual inflation rate ticked up from 0.2 percent in December to 0.4 percent in January. Pricing pressures remain low, however, and speculation persists that the ECB will further expand its quantitative easing program at its March meeting.
Canada, our largest trading partner, continues to struggle due to lower crude oil prices. The RBC Canadian Manufacturing PMI rose from 47.5 in December, its lowest level in the survey’s five-year history, to 49.3 in January. While that figure was a five-month high, manufacturing activity has now contracted in eight of the past 10 months. New orders (up from 47.4 to 49.6), output (up from 46.9 to 49.1) and employment (up from 46.4 to 48.5) continued to fall on net in January, albeit at a slower pace than in the prior report. At the same time, exports (up from 51.4 to 53.1) grew more strongly for the month, likely boosted by exchange rates. Conditions remained weak in Alberta and British Columbia (up from 43.9 to 44.9) and Quebec (up from 46.2 to 47.0) even with progress for the month, but there was decent growth in Ontario (up from 52.6 to 55.4).
Real GDP increased by 0.3 percent in November, with manufacturing output up 0.4 percent. Retail sales were also higher, up 1.7 percent, boosted by strong spending on building materials, clothing, electronics and motor vehicles. Nonetheless, the Canadian economy is expected to slow somewhat in the fourth quarter (with data out on March 1) from the 2.3 percent annual rate observed in the third quarter. In addition, theunemployment rate inched up from 7.1 percent in December to 7.2 percent in January, its highest level since December 2013. This figure has trended higher in recent months, up from 6.8 percent in July. Meanwhile, manufacturing employment declined by 11,000 in January, but on a year-over-year basis, it has increased by 17,100.
Growth in Mexico’s manufacturing sector slowed a little in January. The Markit Mexico Manufacturing PMI declined from 52.4 to 52.2, dropping to a four-month low. With that said, new orders (up from 54.6 to 55.4) and exports (up from 52.5 to 53.6) each accelerated for the month, with sales rising to a nine-month high. The headline number was pulled lower by easing in both output (down from 52.3 to 51.3) and employment (down from 51.9 to 51.2). In addition, raw material costs remain highly elevated (up from 57.4 to 59.8), likely on strength in the U.S. dollar relative to the Mexican peso.
New industrial production data for December will be out today, hopefully improving upon the November figures. Manufacturing production grew 1.8 percent year-over-year in November, but that was down from 3.6 percent in September. On the other hand, retail spending picked up recently, rising from 4.8 percent year-over-year in October to 5.7 percent in November. The unemployment rate has also trended lower, down from 4.6 percent in October to 4.0 percent in both November and December.
Emerging market economies contracted for the tenth consecutive month. The Markit Emerging Markets Manufacturing Index edged up from 49.2 to 49.3, its highest level since June. Yet, it has also remained below 50 each month since March, with the emerging markets continuing to struggle overall. The underlying data for January were mixed. The pace of decline for new orders (up from 49.0 to 49.6) eased for the month, but other measures decreased, including output (down from 49.4 to 49.2), exports (down from 48.9 to 48.5) and employment (down from 48.7 to 48.4). Nonetheless, the forward-looking composite index for future output (up from 57.4 to 58.1) moved somewhat higher, indicating some cautious optimism for the months ahead. This figure, however, was 64.3 one year ago.
The Czech Republic (up from 55.6 to 56.9) remained the bright spot in the emerging markets, with manufacturing activity expanding at its fastest rate since July. Other economies grew more slowly, including Poland (down from 52.1 to 50.9), Taiwan (down from 51.7 to 50.6), Turkey (down from 52.2 to 50.9) and Vietnam (up from 51.3 to 51.5). India (up from 49.1 to 51.1) expanded in January after suffering from floods in Chennai in December; whereas, South Korea (down from 50.7 to 49.5), which expanded in December for the first time since last February, returned to contraction territory once more in January. Meanwhile, a number of countries have remained mired in contraction for much of the past year or so, a trend which continued in the latest data, albeit with some improvements for the month in some cases. This included Brazil (up from 45.6 to 47.4),China (up from 48.2 to 48.4), Hong Kong (down from 46.4 to 46.1), Indonesia (up from 47.8 to 48.9), Russia (up from 48.7 to 49.8) and South Africa(up from 49.1 to 49.6).
Manufactured goods exports declined 6.1 percent in 2015. According to Trade Stats Express, U.S.-manufactured goods exports fell from an all-time high of $1.40 trillion in 2014 to $1.32 trillion in 2015. This trend extends to the top four markets for U.S.–manufactured goods: Canada (down from $271.6 billion to $246.3 billion), Mexico (down from $215.7 billion to $214.2 billion), China (down from $91.2 billion to $89.1 billion) and Japan (down from $54.7 billion to $52.1 billion). On the other hand, exports rose to our fifth and sixth largest trading partners, the United Kingdom (up from $45.2 billion to $48.6 billion) and Germany (up from $43.8 billion to $44.7 billion).
The U.S. trade deficit widened in December. The trade deficit increased from $42.23 billion in November to $43.36 billion. The underlying data were little changed from the month before, with marginal shift in goods exports (down from $121.94 billion to $121.16 billion) and goods imports (up from $183.18 billion to $183.67 billion). The service sector trade surplus also inched up a touch, increasing from $19.02 billion to $19.16 billion. For 2015 as a whole, the trade deficit averaged $42.29 billion, which was not far from the $42.36 billion seen in 2014. Yet, the underlying data reflect some major changes behind the scenes. Goods exports were off sharply, down from an average of $136.05 billion in 2014 to $126.16 billion in 2015, and a similar trend was seen for goods imports, down from $197.84 billion to $183.48 billion.
A fair share of the reduction in goods trade over the past year can be explained by shifts in the petroleum market. Petroleum exports averaged $8.29 billion in 2015, down from $12.03 billion in 2014. Likewise, petroleum imports fell from an average of $27.83 billion in 2014 to $15.17 billion in 2015. In this latest report, the petroleum trade balance widened marginally, up from $5.46 billion to $5.93 billion. Much of the dynamics in these changes over the past year are attributable to sharply lower crude oil prices, and indeed, the average price per barrel in the December calculations ($36.60) was the lowest since January 2005.
The goods exports by sector data were mostly lower in December, including declines for automotive vehicles and parts (down $559 million), industrial supplies and materials (down $414 million), foods, feeds and beverages (down $374 million) and capital goods (down $339 million). These were somewhat offset, however, by increased exports for consumer goods (up $937 million). In contrast, higher goods imports were led by strength in automotive vehicles (up $980 million), industrial supplies and materials (up $507 million) and foods, feeds and beverages (up $181 million). There were decreasing imports for consumer goods (down $631 million) and capital goods (down $27 million).
Associated Industries of Missouri is the sole official designated partner of the National Association of Manufacturers in Missouri.