Global Manufacturing Economic Update: 091313

 
A Publication of the National Association of Manufacturers
Monday Economic Report

September 13, 2013
Monday Economic Report Graph
Global Economic/Trade Trends

The world economy appears to be stabilizing somewhat from weaknesses in the past few months, with the latest data indicating improvements in manufacturing activity in several countries. Europe, which had been in a recession for nearly two years, has now had two straight months of slow""but positive""growth. The Markit Eurozone Manufacturing Purchasing Managers' Index (PMI) increased from 50.3 in July to 51.4 in August, with growth in new orders, exports and output. Other macroeconomic variables reflecting gains include real GDP and retail sales . Nonetheless, hiring growth continues to lag behind, and from the U.S. perspective, manufactured goods exports to Europe have been lower year-to-date. Industrial production declined 1.5 percent in July, suggesting that significant weaknesses remain even with a more upbeat outlook.

Likewise, China's economy has also rebounded from recent softness. The HSBC China Manufacturing PMI shifted from contraction (47.7) in July to very slight growth (50.1) in August. This marked the first expansionary figure since April. The Chinese economy has decelerated from past years, with year-over-year real GDP growth of 7.5 percent in the second quarter, down from double-digit rates of growth just a couple years ago. Production , fixed asset investments , and retail sales have also all picked up the pace in July from weaknesses in prior months.

The higher levels of activity in China have helped to boost much of the rest of Asia, as well. While several Asian countries continue to contract, they are also beginning to stabilize. There are some exceptions to this, of course. For instance, India's economy is suffering from a sharp devaluation in the rupee (see the graphic above) and its own economic policies . The HSBC India Manufacturing PMI declined from 50.1 to 48.5, its first contraction since March 2009. The other outlier, Japan, increased from 50.7 to 52.2 and has been expanding each month since March, according to the Markit/JMMA Japan Manufacturing PMI . In general, these gains mirror improvements in the Japanese macroeconomy since the end of last year.

Despite some better data abroad, the U.S. trade deficit widened in July on higher goods imports and a slight decrease in goods exports. As we have been saying all year, growth in manufactured goods exports have been frustratingly slow in 2013, up just 1.6 percent through the first seven months of the year relative to the same time period last year. This compares to 15.9 percent and 5.7 percent growth in 2011 and 2012, respectively. Exports to China have been one of the bright spots, but other regions have seen some significant easing compared to last year's pace. Hopefully, as the global economy continues to improve, manufacturers will see demand for their goods increase.

Along those lines, we will be closely watching the economic data coming out over the next couple weeks to see if more progress materializes for global manufacturers. A number of countries will be releasing their industrial production data next week, including the United States, which is expected to report a slight uptick in activity in August after being flat in July. Much of the other new data will focus on pricing pressures, both at the consumer and producer level. Overall, inflation has been modest, but with rising petroleum costs, crude costs have edged marginally higher in the most recent reports. The other key date to focus on will be September 23, when Markit releases its Flash estimates of PMI for China, the Eurozone and the United States.

On the policy front, following robust discussions on the Trans-Pacific Partnership (TPP) in August, negotiators are seeking to close gaps and push aggressively for progress in the lead-up to the Bali meeting of Asia-Pacific Economic Cooperation (APEC) forum. The World Trade Organization (WTO) has a new director general, who will be seeking to make progress on customs and trade facilitation talks and an expansion of the Information Technology Agreement (ITA) by the end of the year. U.S. bilateral economic relations with India will move to the leader level as President Barack Obama and Prime Minister Manmohan Singh meet in September. U.S.-E.U. negotiations head for the second round next month, while the National Association of Manufacturers (NAM) works to promote legislative action on Trade Promotion Authority (TPA) that is critical to expedite and implement major new trade agreements.

Chad Moutray
Chief Economist
National Association of Manufacturers

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Global Economic/Trade Trends
  • Global growth showed modest gains in the past month. The JPMorgan Global Manufacturing PMI has held above 50""the threshold for expansion""since December. It rose from 50.8 in July to 51.7 in August on somewhat stronger new orders and output data. The pace of export growth remained unchanged, but capacity utilization and employment indicated marginal pickups. Overall, worldwide hiring appears to be just barely above neutral (up from 50.0 to 50.5 for the month). Input pricing pressures accelerated slightly, up from 52.5 to 54.9, but inflation remains mostly restrained overall.

    The top 10 markets for U.S.-manufactured goods progressed slightly. In the last report, five countries had expansionary PMI values and five were in contraction. This time, only three countries contracted"" Brazil (up from 48.5 to 49.4), Hong Kong (unchanged at 49.7) and South Korea (up from 47.2 to 47.5). On the plus side, two of our largest trading partners shifted from contraction to growth in August"" China (up from 47.7 to 50.1) and Mexico (up from 49.7 to 50.8). In all, the six largest U.S. trading partners (Canada, Mexico, China, Japan, the United Kingdom and Germany) had expansionary levels of manufacturing activity, which should, hopefully, bode well for future growth of exports. This will particularly hold true if these countries' growth rates accelerate, as most of them just barely surpassed the 50 mark for their PMIs.
  • Asian economies have begun to rebound from recent weaknesses. Industrial production picked up from 8.9 percent year-over-year growth in June to 9.7 percent in July to 10.4 percent in August. Most notably, the year-over-year growth rate of electricity output accelerated from 8.1 percent to 13.4 percent. Along those lines, fixed asset investments in the manufacturing sector rose 17.9 percent since last August, up from 17.1 percent in both June and July. Total fixed asset investments also increased, up from 20.1 percent to 20.3 percent year-over-year. As a further sign of progress, retail sales grew 13.4 percent in August over the past 12 months, up from a low of 12.3 percent in February and 13.2 percent in July. Still, the retail side showed areas of weakness. For instance, year-over-year pace auto sales fell from 9.1 percent in July to 7.0 percent in August.

    The HSBC China Manufacturing PMI shifted from contraction in July (47.7) to very slight growth in August (50.1). This marks the first expansionary figure since April, as the Chinese economy had decelerated for much of the spring and early summer. The official PMI data from the National Bureau of Statistics of China also noted an uptick, from 50.3 in July to 51.0 in August. Real GDP has also been slowing, with the Chinese economy climbing 7.5 percent in the second quarter relative to the year before. In comparison, real GDP was growing 11.9 percent at the beginning of 2010 but has eased each quarter since then.

    Slower growth in China produced headwinds for others in the region. With China's economy beginning to stabilize, other Asian countries have begun to see some progress in terms of manufacturing activity. This includes Hong Kong (unchanged at 49.7), South Korea (up from 47.2 to 47.5), Taiwan (up from 48.6 to 50.0) and Vietnam (up from 48.5 to 49.4). While each of these economies continues to contract, the pace of the decline for many of its measures appears to be slowing. The exception to this would be Indonesia (down from 50.7 to 48.5), with data indicating very weak demand for its goods.

    Japan also continues to be a key outlier. The Markit/JMMA Japan Manufacturing PMI increased from 50.7 to 52.2. Manufacturing activity has been positive each month since March, and in general, the gains in the sector mirror the improvements seen in the macroeconomy. Industrial production rose 3.2 percent in July, reversing the decline in June, and real GDP increased 0.9 percent in the second quarter. While not rapid growth, these data show that higher capital spending, government expenditures and exports have helped to lift their economy.
  • The rupee's plummeting value leads to a suffering Indian economy. The HSBC India Manufacturing PMI declined from 50.1 in July to 48.5 in August. This was the first contraction in Indian manufacturing activity since March 2009, with reduced new orders, exports and output. The exchange rate for the Indian rupee has exacerbated the problem. At the beginning of May, one U.S. dollar would exchange for 53.65 rupees. On September 3, that had shifted to 67.08 rupees to one U.S. dollar, a depreciation of 26.2 percent. To help rescue the rupee, the Reserve Bank of India, its central bank, has been forced to raise interest rates , increasing the cost of production for manufacturers in the country and potentially sparking inflationary fears.

    India's problems, however, are not limited to its exchange rate risks. Its own economic policies appear to be hurting its economic performance, with higher tariffs and additional trade barriers making it one of the more protectionist nations. In total, the outlook for the Indian economy has been downgraded. Real GDP growth in the second quarter slowed to 4.4 percent year-over-year, down from 4.8 percent in the first quarter and even faster growth in previous years. For instance, it grew 9.3 percent in the second quarter of 2010.
  • Emerging markets continue to experience some softness in manufacturing activity. The HSBC Emerging Markets Index increased from 49.5 in July to 50.7 in August, but the manufacturing PMI remained in contraction territory (up from 48.5 to 49.8). According to this report, manufacturing output remained flat in August, with new orders barely positive and exports and hiring still somewhat negative.

    In essence, August data showed some improvements from July""particularly with stabilization in China (up from 47.7 to 50.1) and elsewhere in Asia, as discussed above""but these gains were spotty. Manufacturers saw progress in terms of sales and output in the Czech Republic (up from 52.0 to 53.9), Mexico (up from 49.7 to 50.8), Poland (up from 51.1 to 52.6) and Turkey (up from 49.8 to 50.9). In contrast, Brazil (up from 48.5 to 49.4), India (down from 50.1 to 48.5), Indonesia (down from 50.7 to 48.5), Russia (up from 49.2 to 49.4), South Korea (up from 47.2 to 47.5), Taiwan (up from 48.6 to 50.0) and Vietnam (up from 48.5 to 49.4) experienced continued softness.
  • The Eurozone is growing again overall, but not robustly. Europe's economy appears to be stabilizing, which is welcome news after a couple years of recession. Real GDP in the Eurozone rose 0.3 percent in the second quarter""the first positive quarter since the third quarter of 2011. The fastest growth occurred in Portugal (up 1.1 percent), Germany (up 0.7 percent) and the United Kingdom (up 0.7 percent), with Cyprus (down 1.4 percent), Italy (down 0.2 percent), the Netherlands (down 0.2 percent) and Spain (down 0.1 percent) moving in the other direction. Retail sales edged slightly higher (up 0.1 percent) in July. On the negative side (and proof that the continent's problems are still far from over), industrial production declined 1.5 percent in July, reversing the 0.6 percent increase of June.

    Despite the lower industrial production figure, manufacturers are more upbeat about their prospects. The Markit Eurozone Manufacturing PMI rose from 50.3 in July to 51.4 in August. After contracting for 23 consecutive months, manufacturing activity has now expanded for two months in a row. The August increase resulted from stronger growth in new orders, exports and output primarily, but employment levels continue to shrink and actually weakened for the month. Countries that made some progress in August included Austria (up from 49.1 to 52.0), Germany (up from 50.7 to 51.8), Ireland (up from 51.0 to 52.0), Italy (up from 50.4 to 51.3) and the Netherlands (from 50.8 to 53.5). At the same time, France (unchanged at 49.7) and Greece (up from 47.0 to 48.7) remain in contraction.
  • Canada and Mexico, our largest trading partners, are experiencing slow growth. The RBC Canadian Manufacturing PMI edged higher from 52.0 in July to 52.1 in August, suggesting modest growth overall in activity. New orders and production stayed largely flat, but the pace of hiring accelerated somewhat. Five straight months of expansion for manufacturers, however, show an overriding positive note. Real GDP increased 1.7 percent in the second quarter, slowing a bit from the 2.2 percent growth rate in the first quarter, but, this was still stronger than the paltry growth rates of 2012. Likewise, Canadian capacity utilization also eased somewhat in the second quarter, as announced this morning, from 80.8 percent to 80.6 percent. This is down from 81.3 percent in the second quarter of 2012. In other news, the unemployment rate declined from 7.2 percent in July to 7.1 percent in August, with 5,700 additional net new workers added.

    Meanwhile, the HSBC Mexico Manufacturing PMI swung from a marginal contraction (49.7) to slight growth (50.8). The uptick stemmed from higher sales, production and employment, with sluggish export growth. Despite its modest growth rates, Mexico's slowed growth in 2013 presents a challenge, with 0.6 percent and 1.5 percent real GDP increases in the first and second quarters. This compares to 4.6 percent and 4.2 percent growth in the same two quarters in 2012. Industrial production remained weak, declining 0.5 percent in July on a year-over-year basis. Lastly, the unemployment rate has moved higher over the past few months, up from 4.5 percent in March to 5.1 percent in July.
  • The U.S. trade deficit widened in July. The Bureau of Economic Analysis and the Census Bureau reported that the U.S. trade deficit increased from $34.54 billion in June to $39.15 billion in July. The June figure marked the lowest trade deficit since September 2009, but the higher deficit aligned with consensus estimates. Even with the larger deficit in July, the trend so far this year has been for modest improvements in the overall balance. The year-to-date average trade balance (January to July) was $39.94 billion compared to an average of $46.40 billion and $44.55 billion, respectively, in 2011 and 2012.

    Higher goods imports largely impacted the widening of the trade deficit, up from $187.87 billion in June to $191.29 billion in July. In contrast, goods exports declined somewhat from $133.81 billion to $132.71 billion. This largely suggests strength in the United States relative to our largest trading partners, with import growth outpacing exports. Petroleum did not significantly factor into the trade deficit change, up marginally from $10.27 billion to $10.43 billion. Although lower, the service sector trade balance remained essentially unchanged, down from $19.51 billion to $19.44 billion.

    Growth in goods exports in July stemmed mostly from industrial supplies and materials (up $1.69 billion) and foods, feeds and beverages (up $402 million). Weaknesses in exports for non-automotive capital goods (down $1.61 billion), consumer goods (down $1.36 billion), and automotive vehicles, parts and engines (down $179 million) offset these gains.
  • Growth in manufactured goods exports remains stubbornly slow so far this year. The bottom line is that the data continue to show sluggish growth for manufactured goods exports, even with a better trade balance than in the past two years. In the first seven months of 2013, manufactured goods exports equaled $685.03 billion (not seasonally adjusted), or 1.6 percent higher than the $674.27 billion observed in the same time period in 2012. This indicates that manufacturers continue to struggle to grow their overseas sales, even as we have seen some recent stabilization in both Europe and China. Moreover, it reminds us that growth in manufactured goods exports this year remain well below the pace of the past couple years, making it harder to achieve the President's goal of doubling exports by 2015.

    Europe remains one of the weaker regions for export growth. Using non-seasonally adjusted data, year-to-date exports to the European Union have fallen from $157.86 billion to $150.98 billion. We have, however, seen modest gains in many of our largest trading partners, including Canada (up from $170.98 billion to $174.02 billion), Mexico (up from $123.65 billion to $130.30 billion) and China (up from $61.38 billion to $63.82 billion). Other regional data were mixed, with exports to the Pacific Rim countries lower year-to-date (from $218.21 billion to $216.21 billion) while export to South America were higher (from $103.12 billion to $106.10 billion).

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International Trade Policy Trends
  • TPP talks move forward aggressively. In August, TPP trade ministers met in Brunei, followed by the last scheduled round of TPP negotiations. In that round, the partnership made progress on a number of chapters, although countries remain to have significant differences on issues. While no new round has been scheduled, lead negotiators for each of the TPP countries are convening in Washington, D.C., the week of September 16 to chart out next steps and prepare for the expected meetings of TPP leaders and TPP trade ministers on the sidelines of the Bali APEC Leaders' Meeting, taking place October 5 to 7.

    U.S. Trade Representative (USTR) Michael Froman has indicated that the United States hopes to see some key political decisions being made in Bali to resolve the issues and expects TPP leaders to provide guidance to the negotiators on how to move forward. Ambassador Froman continues to press for the conclusion of the TPP talks by the end of the year. Few details have surfaced on progress about specific TPP issues, but the December deadline concerns the business community if progress is not achieved on a range of key issues from market access, intellectual property and investment protection to cross-border data flows and enforceability of key rules.
  • Indian Prime Minister Singh visiting United States at the end of September . Concerns about India's discriminatory trade practices are likely to take center stage when President Obama meets with Indian Prime Minister Singh on September 27. In recent weeks, India has announced new forced localization plans in the power generation sector and revoked patents for five additional innovative medicines. With India's economy in a deep slump and Indian business leaders and The New York Times now joining American manufacturers in calling for fundamental policy reforms, the NAM and its partners in the Alliance for Fair Trade with India will be urging the President to press India to level the playing field and restore trust to a battered bilateral trade and investment partnership.
  • New WTO director general takes office. Brazil's Roberto Carvalho de Azevêdo formally took office as the new WTO director general on September 1. He immediately announced four new deputy director generals""including long-time USTR Geneva Deputy Chief David Shark. In his first statement to WTO General Council on Monday, Azevêdo stressed the importance of a successful Bali Ministerial Conference in December to restore confidence in the multilateral system. He outlined a "rolling set of meetings" over the next three months aimed at achieving progress in trade facilitation, development and agriculture, which is more critical than ever. A WTO report issued September 9 revised global trade growth projections downward from 3.3 percent to 2.5 percent this year and from 5.0 percent to 4.5 percent next year.
  • Bali will host the next APEC meeting. From October 5 to 7, leaders and other senior government officials from the 21 APEC economies will convene in Bali, Indonesia, for its annual summit . Indonesia has focused APEC activities throughout the year on three priorities: achieving the goals of open trade among the APEC economies, the achievement of sustainable growth and the promotion of connectivity.
  • Expansion of a trade facilitation agreement and the ITA remain WTO priorities for end of year. Director General Azevêdo and USTR Michael Froman recently highlighted the importance of concluding a meaningful trade facilitation agreement as part of a package for the WTO ministerial conference scheduled for December in Bali. The latest consolidated revised draft text reflects concurrence on a variety of issues, including the release of goods and trade facilitation measures for authorized operators. While negotiators continue their technical work, India is insisting that the document be tied to a pact on relaxing food subsidy limits for developing countries with food security challenges.

    An expanded ITA is another potential Bali outcome, if countries can agree to reduce their lists of "sensitive" items they either wanted to exclude from the agreement or reserve for tariff phase-outs over several years. In July, negotiators had identified 256 information and communications technology (ICT) product lines for possible inclusion. The European Union identified 10 sensitive products, and the United States one; however, China identified 148, thus halting expansion. An expanded ITA could boost U.S. export of ICT products by $2.8 billion and global GDP by $190 billion.
  • Transatlantic Trade and Investment Partnership (TTIP) negotiations head to second round. The second round of the TTIP negotiations between the United States and the European Union will take place in Brussels starting October 7. Building off of the initial July round in Washington, D.C., TTIP negotiators will be meeting across many different groups to forge an agreement on everything from tariffs and non-tariff barriers to intellectual property, investment and regulatory coherence. If successful, the TTIP would be the world's largest trade pact, covering more than 46 percent of world GDP. The NAM remains actively involved in detailing priorities for these negotiations and is co-leading work on goods trade, intellectual property, regulatory coherence, investment and customs for the broader business community.
  • Promoting small business exports to the European Union. USTR and the Small Business Administration (SBA) launched a new effort to expand small business exports to the European Union. The pair are holding listening sessions throughout the country, and the U.S. International Trade Commission has formally requested comments and testimony here .
  • The NAM asks congressional trade leaders to move TPA. On Tuesday, the NAM joined other leading business associations on a letter calling on the chairmen and ranking members of the Senate Finance and House Ways and Means committees to develop and pass TPA legislation. As a founding member of the Trade Benefits America Coalition , the NAM supports durable TPA in line with the priorities it circulated in July. The Obama Administration is expected to support action on TPA this fall, but the prospects remain unclear. The NAM will continue to follow and report on developments.

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Exports in Action
  • Trade Lead: Rehabilitation of sewerage treatment plant and construction of sanitation facilities for Kericho Town in Kenya - Bids are due on October 3. The Lake Victoria South Water Services Board (LVSWSB) is currently accepting sealed bids from prospective contractors for the rehabilitation of a sewerage treatment plant and construction of sanitation facilities. This project will also include the extension of pipelines and purchase of exhausters, motor vehicles and water kiosks.

    Eligible firms interested in bidding may download the tender document free of charge and read the procurement notice , including other options for obtaining tender information, on the LVSWSB Web site. Bids must be received by 10 a.m. local (East Africa) time on October 3, 2013.

    This project follows the completion of a U.S. Trade and Development Agency (USTDA)-funded feasibility study (USTDA Project Number 2004-10030B), completed in 2007 for the Kenyan Ministry of Water and Irrigation on the Lake Victoria South Water and Wastewater projects. The study focused on determining the feasibility of establishing viable, affordable, and self-sustaining water and wastewater utilities in three towns in western Kenya (Kericho, Kissi and Migori) and recommended a process to commercialize the related infrastructure to ensure its sustainability. U.S. entities may request the report from the USTDA Web site . For more information, contact Jason Nagy with the USTDA in Johannesburg (+27 11 290 3084 or jnagy@ustda.gov ) or Paul Alvaro Marin with the USTDA in Virginia (703) 875-4357 or pmarin@ustda.gov ).

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

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