Global Manufacturing Economic Update

A Publication of the National Association of Manufacturers

November 2, 2012

In the past month, there have been some signs that the overall global economy is improving, despite significant headwinds. We continue to see modest growth in North America, including the United States and our largest trading partners, Canada and Mexico. Both Brazil and China have seen gains in production activity, with Brazil edging into expansion territory (with a Purchasing Managers’ Index (PMI) of 50.2) and China just barely there (49.5). (PMI values over 50 suggest that manufacturing activity is expanding, with contractions for values under 50.) This is not to suggest that these nations’ economies are strong, as persistent weaknesses continue to dampen growth, but it does indicate a more positive picture than seen in other regions of the world, most notably in Europe.

Manufacturing activity in the Eurozone is off sharply. The Flash Eurozone Manufacturing PMI fell from 46.1 in September to 45.3 in October. Declining new orders continue to reduce production and employment across the continent. October manufacturing PMI values from Markit show contracting activity levels, even as some indices improved for the month. This includes France (43.5, up from 42.7), Germany (45.7, down from 47.4) and the United Kingdom (47.7, down from 48.4). At the same time, these data are supported by reports that Eurozone industrial production has fallen nearly 3 percent over the past year, and unemployment has risen to an all-time high of 11.6 percent. (Spain’s unemployment rate is a whopping 25.8 percent.) Nonetheless, despite these dire statistics, it is important to note that the European Central Bank’s actions—including its program to purchase sovereign debt from troubled nations—has lifted spirits somewhat, even if it has not solved the underlying structural challenges.

As noted last time, six of the top 10 export markets for U.S.-manufactured goods are currently contracting, with PMI values of less than 50. This complicates our ability to increase exports. The most recent data suggest that the U.S. trade deficit widened in August on lower goods exports and imports. Higher petroleum costs accounted for much of this, but there were also significant declines in other categories, including industrial supplies, foods and consumer goods. On the other hand, year-to-date manufactured goods exports were $43.6 billion higher in 2012 than for the same period in 2011. While this suggests a much slower pace than in 2010 or 2011 (mostly due to the slower global economic environment), it is perhaps surprising that export growth is positive at all given the number of headwinds in the marketplace right now.

Over the course of the next week, several PMI reports will come out providing even greater detail on the current global manufacturing environment. This will culminate in the release of the JPMorgan Global Composite PMI on Tuesday, which summarizes activity across 32 different countries. The last one observed falling output, new orders and employment across the world manufacturing sector, with some countries helping to lift the index from 48.1 to 48.9. I would expect this figure to reflect some gains overall but continuing to contract. The other highlight of the week will come on Thursday, with the release of new international trade data for September.

Chad Moutray
Chief Economist
National Association of Manufacturers

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Europe’s economic problems deepen. The Flash Eurozone Manufacturing PMI dropped from 46.1 in September to 45.3 in October, bringing it back essentially to where the PMI was in August when it was 45.1. Steep declines in new orders continue to be the problem, although the rate of decline appears to have eased somewhat from last month. While the challenges are continent-wide, Markit reports that the worst “performance was again seen outside of France and Germany.” European employers reduced employment overall, especially in manufacturing.

Other economic indicators support this view. For instance, Eurozone industrial production was down 2.9 percent year-over-year in August, and the September unemployment rate was 11.6 percent. Falling European exports led to a deterioration of the Eurozone trade surplus from €14.7 billion in July to €6.6 billion in August. The International Monetary Fund (IMF) projects that real GDP in European countries will contract by 0.4 percent in 2012. Its forecast for 2013 is for 0.2 percent growth, with continued weaknesses in Cyprus, Greece, Italy, Portugal, Slovenia and Spain.

The Chinese economy improves but continues to contract. The China Manufacturing PMI rose from 47.9 in September to 49.5 in October, near July’s level of 49.3. This could be seen as progress, particularly with improvements in new orders, exports and output. However, each indicator remains below 50—the threshold for expansion in the sector—and hiring appears to have slowed.

This suggests that the Chinese economy continues to be slowing, with larger headwinds having an impact even as the October readings show some stabilization. Chinese GDP rose 7.4 percent in the third quarter of 2012, down from 9.1 percent in the third quarter of 2011. At the same time, year-over-year growth in industrial production improved to 9.2 percent in September, up from 8.9 percent in August. However, even this reflects some weaknesses, as this figure was 11.9 percent just six months ago.

The euro and yuan have strengthened during the past few months. Earlier in the year, people were openly questioning the euro’s long-term viability. The result was a steep decline in the euro relative to the U.S. dollar, which fell to a low of $1.2062 on July 24. This presented a challenge for manufacturers in the United States, as a strengthened dollar made our exports more expensive. Since then, the euro has strengthened, rising to $1.3001 on October 4. The euro has weakened slightly since, and it is currently at $1.2940.

Meanwhile, the Chinese yuan has also strengthened over essentially the same time period, reaching a record high. Some have suggested that the Chinese government might be letting the yuan rise to defuse criticism that it is “undervalued.” To illustrate this, $1 could be exchanged for 6.3879 yuan on July 25, and it was 6.2372 on Wednesday, October 31.

U.S. real GDP increased modestly during the third quarter. The Bureau of Economic Analysis reported that the U.S. economy grew 2.0 percent in the third quarter, up from 1.3 percent in the second quarter. Consumer spending accounted for half of the growth in real GDP, with strong contributions from both durable and nondurable goods spending. Government spending was also higher, boosted perhaps by end-of-fiscal-year expenditures, especially on defense goods. Overall business investment, however, weakened with no change in equipment and software purchases and less spending on construction projects. Residential construction, however, has been a bright spot, especially with the latest housing numbers.

I expect real GDP to grow 1.8 percent overall in 2012. The forecasts for 2013 remain uncertain depending on the resolution of the fiscal abyss. If policymakers do not avert the fiscal crisis, first quarter growth in 2013 will be sharply negative. Otherwise, I would anticipate modest growth to continue into the new year, remaining in the 2.0 to 2.5 percent range.

PMI data tend to support the view that the United States is growing moderately. The Institute for Supply Management’s (ISM) index rose from 51.5 in September to 51.7 in October—an improvement after contracting for three straight months. Meanwhile, the Markit PMI for the United States edged slightly lower from 51.1 to 51.0. While ISM and Markit report slow growth in new orders, export sales declined at a faster rate in both.

Economic growth in other regions remains mixed. The latest Markit data suggest that six of the 10 largest export markets for U.S.-manufactured goods have PMI readings below 50. These are the same nations as reported last month, with Brazil, Canada, Hong Kong and Mexico expanding. The Netherlands fell below 50 in October, with Brazil moving above 50.

North America remains one of the stronger regions in the world, with modest but still tepid growth. Canadian industrial production rose 0.5 percent in September, recovering from four consecutive months of declines. The IMF anticipates its real GDP to increase 1.9 percent this year. The Mexican economy is expected to grow even faster, up 3.8 percent However, growth in industrial production in Mexico eased, up 3.6 percent in August after growth of 5.0 percent in July. Meanwhile, industrial production in Brazil rebounded in August (up 1.5 percent) after expansionary fiscal and monetary policy actions; nonetheless, manufacturing activity remains down 2.0 percent on a year-over-year basis. Part of the challenge in Brazil has been its implementation of protectionist tariffs (see below).

U.S. trade deficit widened on lower exports and imports. The Bureau of Economic Analysis and the Census Bureau reported that the U.S. trade deficit was $44.2 billion in August, an increase from July’s $42.5 billion. A drop in goods exports that was larger than the decline in goods imports mostly contributed to the overall deficit widening. Goods exports decreased from $130.7 billion to $128.5 billion; meanwhile, goods imports fell from $188.5 billion to $187.8 billion. The bottom line is that slowing global growth is sapping trade activity, both for exports and imports.

Looking specifically at major categories, total goods exports were lower for the month. The largest declines were in industrial supplies and materials (down $1.2 billion); foods, feeds and beverages (down $1.1 billion); consumer goods (down $422 million) and automotive vehicles and parts (down $87 million). In contrast, nonautomotive capital goods exports rose $382 billion.

Higher petroleum prices impacted the U.S. trade balance. The petroleum sector mainly contributed to the trade deficit widening, most likely due to higher per barrel costs. The petroleum trade balance grew from $21.0 billion in July to $23.5 billion in August. Petroleum exports decreased by $840 million in August, and petroleum imports rose by $1.6 billion. The non-petroleum trade balance narrowed from $36.3 billion to $35.3 billion with both lower export and import activity. In other words, trade shifts in the petroleum market resulted in the overall trade deficit widening.

Manufactured goods exports were higher in August. Manufactured goods exports rose from $80.9 billion to $86.1 billion (not seasonally adjusted). This data has been highly volatile during the past few months, as it was $89.4 billion in June. Therefore, the more important figure to look at is the year-to-date figure. There have been $680.4 billion in manufactured goods exports during the first eight months of 2012, which is $43.6 billion more than during the same time period in 2011. Despite so many headwinds facing the industry, export growth has been positive, albeit significantly below the pace of the previous two years.

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U.S.-Panama Trade Promotion Agreement goes into effect. On Wednesday, October 31, Panama dropped tariffs on more than 86 percent of industrial and consumer products exported from the United States. All remaining tariffs on industrial goods will be eliminated within 10 years. Manufacturers rely on strong trade agreements such as this to remove tariff and non-tariff barriers for trade and investments. As one of the fastest-growing markets in Latin America, Panama represents a significant opportunity for manufacturers in the United States.

Additional information on how manufacturers in the United States can benefit from this agreement can be found on the International Trade Administration’s website. While the agreement improves market access for U.S. exporters, protects manufacturers’ investments in Panama and improves intellectual property rights protections, work remains to be done. For instance, Panama continues to work on combating illicit trade across its borders. While illicit trade is a worldwide problem, it is of particular concern in Panama given its strategic location as a main port of entry to the United States and the western hemisphere.

The United States and the European Union (EU) work toward potential launch of new trade talks. On Tuesday, October 23, the EU Parliament gave the European Commission authority to launch trade negotiations with the United States. This decision is in advance of the expected release in December of the final report from the U.S.-EU High-Level Working Group on Jobs and Growth, which is likely to indicate support to deepen the U.S.-EU economic relationship. In June’s interim report, the United States and the EU indicated that a comprehensive trade deal could bring important benefits for growing the transatlantic economies.

The United States and the EU already have the world’s largest commercial relationship, but major opportunities for increased trade, investment and cooperation remain. A trade-liberalizing Transatlantic Partnership Agreement could also demonstrate the strong leadership of the United States and the EU to the rest of the world, putting both economies in a stronger global position. The benefits of a commercially meaningful and successful U.S.-EU trade negotiation would be substantial for manufacturers. The NAM’s recent submission for public comment on promoting U.S.-EU regulatory cooperation is available here.

Brazil moves to raise tariffs on another 100 products. In late October, Brazil announced that it is beginning a process to increase tariffs on another 100 tariff line items. Brazil will seek requests from the private sector and review those requests internally. In September, Brazil increased tariffs on about 100 different product imports, including certain capital goods, chemicals, medical equipment and steel products. Brazil plans to move forward with another round of hikes, which are expected to go into effect early next year. Further tariff increases, combined with other measures by the Brazilian government to close its market, such as domestic content requirements, will impede Brazil’s business partnerships with the United States and other major trading nations, exacerbate growth and decrease investor confidence.

Trans-Pacific Partnership (TPP) talks gearing up with two new participants. Canada and Mexico formally joined the TPP negotiations in October and are now in discussions with nine original negotiating countries to come up to speed on all the negotiating issues for the 15th round of TPP talks in Auckland, New Zealand, in December 2012. The Auckland Round seeks to make progress on a host of key issues from market access to government procurement. More sensitive and challenging issues are not expected to see any resolution until 2013.
Russia joins the World Trade Organization (WTO). Russia formally joined the WTO on August 22 and agreed to reduce tariffs and non-tariff trade barriers, provide protections for intellectual property and abide by other basic WTO rules, all subject to a binding dispute settlement. While full implementation of these commitments will increase opportunities to export and invest in the Russian market, manufacturers in the United States will only fully benefit from Russia’s WTO membership when the United States enacts Permanent Normal Trade Relations (PNTR) with Russia. Congress must graduate Russia from the decades-old Jackson-Vanik provisions of the Trade Act of 1974. Russia imported nearly $300 billion in goods in 2011, yet the United States accounted for less than 5 percent of those imports. Cleary, there is room for growth. Click here to tell Congress to pass legislation granting PNTR with Russia to prevent manufacturers in the United States from missing out on new export opportunities in the growing Russian market.

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Questions or comments? Please contact Chad Moutray at cmoutray@nam.org