- 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.