- The global economy continues to expand modestly, albeit at a somewhat slower pace. The JPMorgan Global Manufacturing PMI edged lower, down from 53.2 in February to 52.4 in March. This was the lowest level since October, but it also marked the 16th straight month of expanding manufacturing activity worldwide. The underlying data in March were somewhat mixed. New orders (down from 54.6 to 53.2) and output (down from 54.6 to 53.4) were both off slightly, but still reflected modest increases. At the same time, the pace of growth for exports (up from 51.5 to 51.7) and employment (up from 51.3 to 51.5) was marginally higher.
As noted last month, the United States accounts for one-quarter of the weight in the Global PMI measure, making it somewhat more difficult to disentangle the strength of the U.S. manufacturing sector from the worldwide analysis. For its part, the Markit U.S. Manufacturing PMI declined from 57.1 to 55.5, but it still reflected relatively healthy gains in both sales (down from 59.6 to 58.1) and production (down from 57.8 to 57.5). Likewise, the competing PMI measure from the Institute for Supply Management noted a bit of an improvement in March (up from 53.2 to 53.7) as manufacturers have begun to move beyond the winter storms of January and February, with production turning positive (up from 48.2 to 55.9) and sales accelerating (up from 54.5 to 55.1).
Looking at the top 10 markets for U.S.-manufactured goods, all but China (down from 48.5 to 48.0) and Hong Kong (down from 53.3 to 49.9) saw manufacturing activity expand in March. South Korea’s economy (up from 49.8 to 50.4) returned to slight growth for the month. In the remaining countries, the data were largely mixed. Most of our key markets had some easing in their growth rates for the month, but some of these nations continue to have decent growth, particularly our trading partners in Europe, such as Germany (down from 54.8 to 53.7), the Netherlands (down from 55.2 to 53.7) and the United Kingdom (down from 56.2 to 55.3).
- Manufacturing activity in emerging markets contracted slightly in March. The HSBC Emerging Markets Index stalled, down from 51.1 to 50.3. More importantly, the manufacturing PMI for emerging markets fell below the threshold of 50 (down from 50.3 to 49.8), contracting for the first time since July. New orders (down from 51.1 to 49.6) and output (down from 51.0 to 49.7) have both stagnated, dragging the headline figure lower. Interestingly, export sales (up from 50.4 to 51.6) and employment (up from 49.1 to 50.3) registered slight gains.
In particular, the weakness in the data stems largely from two countries: China (down from 48.5 to 48.0) and Russia (down from 48.5 to 48.3). Indonesian manufacturers also reported frozen activity levels in March (down from 50.5 to 50.1), with production lower. Several other countries saw an easing in demand and output, even as they have modest growth rates since last fall. These include India (down from 52.5 to 51.3), Mexico (down from 52.0 to 51.7), Taiwan (down from (54.7 to 52.7) and Turkey (down from 53.4 to 51.7).
On the positive side, Brazil (up from 50.4 to 50.6), South Korea (up from 49.8 to 50.4) and Vietnam (up from 51.0 to 51.3) reported improvements last month, including slight pickups in new orders and production. Meanwhile, the Czech Republic (down from 56.5 to 55.5) and Poland (down from 55.9 to 54.0) continue to see strong growth in their manufacturing sectors despite some slight deceleration in March. The production index in the Czech Republic (down from 61.1 to 60.8), for instance, has exceeded 60—signifying healthy gains—for two straight months.
- Europe’s economies continue to grow, but with some easing in activity and worries about possible deflation. The Markit Eurozone Manufacturing PMI decreased from 53.2 to 53.0, down for the second straight month. Despite the slight deceleration, this was the ninth consecutive month of expansion for Europe following a deep two-year recession. Even with some easing in the pace of growth, new orders (down from 54.5 to 54.3) and exports (down from 54.5 to 53.4) continue to increase at decent rates, and production (up from 55.3 to 55.6) picked up for the month. Through the first three months of 2014, the output measure has averaged 55.9, which has been definite progress over the average of 50.6 for 2013 as a whole or the 53.1 average recorded in the second half of last year. As such, the Eurozone continues to make slow-but-steady improvements in its economic health.
France (up from 49.7 to 52.1) serves as a case in point for this. Its manufacturing sector expanded for the first time since July 2011, with modest production growth (up from 50.8 to 53.3) that was the highest in nearly three years. We also saw continued progress in Austria (down from 53.0 to 51.0), Ireland (up from 52.9 to 55.5), Italy (up from 52.3 to 52.4) and Spain (up from 52.5 to 52.8). Similarly, manufacturing demand and production remain strong in Germany (down from 54.8 to 53.7), the Netherlands (down from 55.2 to 53.7) and the United Kingdom (down from 56.2 to 55.3). Many of these countries saw falling output prices. In Germany, for instance, output prices (down from 51.2 to 49.4) contracted for the first time since June, raising deflation worries. Another worry was Greece (down from 51.3 to 49.7), with contracting employment levels and an easing in exports. Fortunately, Greek sales and production remained positive.
On the topic of deflation concerns, the ECB held interest rates steady at its most recent meeting, but ECB President Mario Draghi said the bank was open to pursuing quantitative easing to stimulate more growth on the continent. He and others are worried about disinflationary pressures, with prices decelerating significantly. Annual inflation rates in the Eurozone have fallen from 1.7 percent in March 2013 to 0.5 percent in March 2014, and producer prices fell 0.2 percent in February. Businesses feel compelled to lower prices to be able to move products, a sign that slow employment and income growth remain a significant challenge, even in light of recent economic progress.
Real GDP increased 0.3 percent in the fourth quarter, up from 0.1 percent in the third quarter. Forecasts suggest that the Eurozone will grow 1.1 percent in 2014. However, industrial production declined 0.2 percent in January, with year-over-year growth of 2.1 percent. On Monday, we will get new industrial production data for February, which are expected to show modest gains. Beyond that, the unemployment rate fell below 12 percent for the first time since January 2013, and retail sales grew 0.4 percent in February, increasing for the second straight month but up a rather weak 0.8 percent year-over-year.
- The Chinese manufacturing sector has contracted for three straight months. The HSBC China Manufacturing PMI declined further in March, down from 48.5 to 48.0. This index has now decreased each month since October (50.9). March’s data reflect decelerating activity levels for new orders (down from 48.6 to 46.5) and output (down from 48.8 to 47.2). On the positive side, export sales shifted from contraction (48.5) to a slight expansion (51.3), and employment growth declined at a slower rate (up from 47.2 to 49.4). In light of recent weaknesses, China has begun to put stimulative measures in place to boost the economy, with worries that real GDP will fall below Beijing’s annual growth target of 7.5 percent. Real GDP for first quarter 2014 will be released on April 15, with growth expected to be below the 7.7 percent observed in the fourth quarter.
In addition to real GDP, we will also get new data for industrial production, fixed-asset investment and retail sales next week. Each has decelerated in recent reports. For instance, the annualized growth rate for industrial output has fallen from 10.4 percent in August to 8.6 percent in February. Fixed-asset investment (down from the year-over-year pace of 18.5 percent in December to 15.1 percent in February) and retail sales (down from 13.6 percent at the annual rate in December to 11.8 percent in February) have also eased of late.
As noted in the last report, the Bank of China has worked to weaken its currency over the past two months. At the beginning of February, the exchange rate was 6.0600 Chinese yuan to the U.S. dollar, increasing to 6.2005 yuan on April 9. This suggests that the dollar can purchase more yuan (or more Chinese goods) than it could have just a few months ago. In other words, the Chinese currency has devalued somewhat. Behind this trend, the Chinese government is trying to fend off speculators. Still, the longer-run trend has been for the yuan to appreciate against the U.S. dollar, a slow-but-steady (and perhaps not fast enough for some manufacturers in the United States) trend engineered by the Bank of China since 2005.
- Canada’s economy has begun to grow modestly, but Mexico’s economy continues to decelerate. The RBC Canadian Manufacturing PMI increased from 52.9 to 53.3, edging higher for the second straight month. Growth remains modest overall, with an increased pace for new orders (up from 52.6 to 53.4), export sales (up from 50.7 to 52.4) and hiring (up from 50.4 to 50.8). Production (down from 53.6 to 53.4) was off marginally.
Real GDP in Canada rose 2.9 percent in the fourth quarter, up from 2.2 percent in the second quarter and 2.7 percent in the third quarter. Manufacturing capacity utilization edged higher in the fourth quarter to 80.7 percent, its fastest pace in more than a year. In January, manufacturing output grew 2.0 percent, rebounding from December’s 1.9 percent decline. Durable goods sector production increased 2.5 percent, with nondurable goods output up 1.5 percent. The unemployment rate fell from 7.0 percent in February to 6.9 percent in March, its lowest point in four months. Nonetheless, manufacturing employment declined by 9,200 for the month, with 16,000 more workers added year-over-year.
Meanwhile, the Mexican economy has decelerated recently, with real GDP growth of just 0.7 percent in the fourth quarter of 2013, down from 1.4 percent in the third quarter. Industrial production has also been weak, up 0.7 percent year-over-year in January; however, manufacturing has fared better than other sectors, up 2.5 percent. The HSBC Mexico Manufacturing PMI has fallen from 54.0 in January to 52.0 in February to 51.7 in March. Slower growth for sales (down from 53.7 to 53.0) and output (down from 52.1 to 51.5) contributed to last month’s decrease, but fortunately, exports (up from 49.2 to 51.0) expanded once again.
- Goods exports fell in February on a weak international market. The U.S. trade deficit rose from $39.28 billion in January to $42.30 billion in February. This was the highest deficit since September, and it was the result of a decrease in goods exports (down from $133.75 billion to $131.72 billion) and an increase in service-sector imports (up from $38.49 billion to $39.29 billion).
The increased goods trade deficit (up from $59.50 billion to $61.73 billion) was almost evenly distributed by petroleum and nonpetroleum factors. Petroleum exports declined somewhat (down from $12.34 billion to $11.09 billion), but petroleum imports also decreased slightly (down from $31.68 billion to $31.03 billion).
Looking specifically at goods exports by sector, February’s numbers were mostly lower. The exceptions were consumer goods (up $1.19 billion) and automotive vehicles and parts (up $96 million). Lower export levels included industrial supplies and materials (down $2.67 billion), nonautomotive capital goods (down $894 million) and foods, feeds and beverages (down $18 million).
- Growth in U.S.-manufactured goods exports continue to disappoint. Manufactured goods exports in the first two months of 2014 were $182.75 billion using non-seasonally adjusted data. This was down 0.6 percent from the $183.78 billion observed for January and February 2013. As such, it indicates that manufactured goods exports remain soft despite some economic progress abroad in recent months, continuing last year’s trend.
In 2013, manufactured goods exports rose 2.4 percent, decelerating from the 5.7 percent annual growth rate in 2012. It is also well below the 15 percent rate needed to double exports by 2015, as outlined in the President’s National Export Initiative. We hope that cautious optimism for better worldwide growth rates will produce improved manufactured goods exports moving forward.
On the positive side, goods exports to our five largest export trading partners were mostly higher year-to-date. For instance, Mexico (up from $35.61 billion to $37.50 billion), China (up from $18.69 billion to $20.24 billion), Japan (up from $10.18 billion to $10.88 billion) and Germany (up from $7.65 billion to $8.22 billion) all notched increases in exports in the first two months of this year relative to last year. The lone holdout was our largest trading partner, Canada (down from $46.35 billion to $46.15 billion), which had marginal declines.