Global Manufacturing Economic Update: 110813

A Publication of the National Association of Manufacturers

November 8, 2013

The global economy continues to see progress this autumn, with manufacturing activity picking up from recent softness. The JPMorgan Global Manufacturing Purchasing Managers' Index (PMI) increased from 51.8 in September to 52.1 in October, its highest point since May 2011. While this still reflects only modest growth, stabilization in Europe and Asia has helped to lift overall sentiment, new orders and production in many key markets. Moreover, all top 10 export destinations for U.S.-manufactured goods grew on net in October, with a PMI value greater than 50. This was the first time since we began preparing this report that no countries contracted, and it represents a nice turnaround from only two months ago when half of these markets contracted.

This progress can also be seen in much of the underlying data, but with slow growth overall. For example, the Markit Eurozone Manufacturing PMI has shown modest expansion for four consecutive months""a sign that Europe has begun to rebound after its deep two-year recession. Despite the more uplifting news, the European Commission this week slightly lowered its forecast for European real GDP to 1.1 percent growth in 2014, down from an earlier estimate of 1.2 percent growth. France and Greece both continue to contract, suggesting pockets of weakness are still present. Moreover, recent data on retail sales and employment continue to suggest challenges. The European Central Bank continues to worry about sluggish economic growth and disinflation, and yesterday, it surprised the market by lowering its key interest rate to 0.25 percent. On a more positive note, the prospect of even minimal growth has lifted spirits across the continent, with the ZEW Indicator of Economic Sentiment reflecting increased relative optimism in October.

The story is similar in Canada, throughout Asia and in the emerging markets. The RBC Canadian Manufacturing PMI rose to 55.6 in October, its fastest pace since April 2011. New orders and production have rebounded from softness during the spring and summer. We hope better economic news in Canada""our largest trading partner""will increase demand for our exports there. Likewise, the HSBC China Manufacturing PMI has expanded for three straight months, albeit slowly, up from 50.2 in September to 50.9 in October. Moreover, while economic growth has decelerated over the past few years, real GDP picked up from 7.5 percent in the second quarter to 7.8 percent in the third quarter. Industrial production and fixed asset investments have also been higher in the third quarter, suggesting improvements in overall activity. Furthermore, stabilization in Europe and Asia has helped to buoy most of the emerging markets, with the HSBC Emerging Markets Index up from 50.7 to 51.7.

Nonetheless, growth in U.S.-manufactured goods exports remains frustratingly low so far this year despite modest gains in the economies of our major trading partners. U.S.-manufactured goods exports have risen just 1.8 percent through the first eight months of 2013 relative to the same time period in 2012, using non-seasonally adjusted data. This represents only marginal improvement from July's 1.6 percent pace, and it presents a challenge in our nation's ability to double exports by 2015 as outlined in the President's National Export Initiative . Reduced year-to-date exports to Europe account for much of the slower pace of U.S.-manufactured goods exports, with eased growth rates to many of our other large trading partners as well. However, the recent deceleration in the U.S.-euro exchange rate should help to boost our exports to the EU.

Next week, we will get industrial production data from a number of countries, including the United States. Output is expected to continue to show signs of improvement in the United States and China, but production is predicted to decline somewhat in the Eurozone. Europe is also anticipated to report its second straight month of positive real GDP growth, with third-quarter data similar to the second-quarter growth rate of 0.3 percent.

On the trade front, negotiations continue around the clock on the Trans-Pacific Partnership (TPP) talks, while the Administration, Congress and the business community accelerate efforts to move forward on Trade Promotion Authority (TPA). Manufacturers worked across the Atlantic to support the inclusion of key trade secret issues in the Transatlantic Trade and Investment Partnership (T-TIP) trade discussions as U.S. and EU negotiators prepare to return to the table this month and next to make progress on these negotiations. All eyes turn again toward Bali as the World Trade Organization (WTO) seeks to address trade facilitation and information technology liberalization to cut red tape and unnecessary costs at the border.

Chad Moutray
Chief Economist
National Association of Manufacturers

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Manufacturing activity grew modestly worldwide, gaining steam from recent weaknesses. The JPMorgan Global Manufacturing PMI increased from 51.8 in September to 52.1 in October, its highest point since May 2011. This suggests progress from the spring, when activity was nearly stalled and the Global PMI was 50.4 in April, the low point of the year. It has moved slowly but steadily higher since then. October's gain was largely due to improvements in new orders (up from 52.8 to 53.2) and exports (up from 50.9 to 52.1). Output (down from 53.0 to 52.9) was essentially unchanged for the month, however, and employment growth (up from 50.2 to 50.8) was only barely above neutral even as hiring accelerated a bit. Inventory stockpiles continued to contract (up from 49.3 to 49.8), albeit less so than the month before and nearly being neutral.

None of the top 10 markets for U.S.-manufactured goods contracted in October. This is a significant milestone of progress, as just six countries expanded in September, and this is the first time since we began preparing this report that none of the top 10 markets had PMI readings under 50. Of those countries shifting this month, Brazil (up from 49.9 to 50.2) and South Korea (up from 49.7 to 50.2) shifted from slight contraction in September to a very small expansion in October. In addition, Hong Kong (up from 50.0 to 50.1) and Mexico (up from 50.0 to 50.2) both moved from being unchanged to slight growth last month. While good news, this does not mean that these countries are out of the woods yet. For instance, manufacturing output in Mexico continues to fall, even as new orders have risen.

Canadian manufacturers have seen growth, whereas in Mexico, activity has nearly stalled. The RBC Canadian Manufacturing PMI increased from 54.2 in September to 55.6 in October, its fastest pace since April 2011. As such, it suggests that the Canadian economy has begun to recover from softness during the spring, when the PMI bottomed out at 49.3 in March. Relatively strong growth in new orders (up from 56.1 to 58.5) and production (up from 53.5 to 56.6) lifted October's data. At the same time, employment (down from 54.5 to 53.7) and exports (down from 54.8 to 52.6) eased somewhat for the month, with both still up modestly. Despite these gains, manufacturing output fell 0.3 percent primarily due to weaker nondurable goods activity (down 0.7 percent). In addition, manufacturing employment fell by 6,400 in October, even as the overall unemployment rate remained unchanged at 6.9 percent.

Meanwhile, the HSBC Mexico Manufacturing PMI continues to suggest some stagnation in activity. The good news was that the PMI edged marginally higher from 50.0 (neutral) to 50.2 (very slight growth) for the month, with an average PMI reading of 50.2 since June. Even though the composite index was above 50, output contracted (down from 50.0 to 49.4) for the second time in the past four months. Industrial production declined 0.7 percent in August, but manufacturing output was up 1.6 percent. Stronger exports ""up 7.2 percent year-over-year in September""primarily fueled manufacturing demand. In addition, the unemployment rate continued to move higher, up from 4.5 percent in March to 5.3 percent in September.

Europe's economy continues to stabilize. The Markit Eurozone Manufacturing PMI edged slightly higher from 51.1 in September to 51.3 in October. While this suggests slow growth for the continent, manufacturing activity is expanding, with the PMI greater than 50 for four straight months. This follows 23 consecutive months of contraction. Hence, the positive growth figures have provided a bit of a psychological boost despite the fact that the underlying PMI data were somewhat mixed, with output (up from 52.2 to 52.9) and capacity utilization (up from 51.2 to 51.6) higher but new orders (down from 52.1 to 51.9) and employment (down from 49.0 to 48.8) lower. This was the 21st straight month of negative hiring growth.

While countries in Europe have made progress of late, there are still pockets of weakness. For instance, while France (down from 49.8 to 49.1) and Greece (down from 47.5 to 47.3) have slowed the pace of decline, both countries remain in contraction territory, with new orders still falling. Most of the Eurozone is experiencing some degree of expansion, with the fastest growth in Ireland (up from 52.7 to 54.9), the Netherlands (down from 55.8 to 54.4) and the United Kingdom (down from 56.3 to 56.0). These countries saw healthier gains in new orders and output. In the United Kingdom, for example, the new orders index was 60.5 in October, a sign that sales growth increased strongly for the month. Elsewhere, manufacturing activity grew more modestly, including in Austria (up from 51.1 to 52.7), Germany (up from 51.1 to 51.7), Italy (down from 50.8 to 50.7) and Spain (up from 50.7 to 50.9).

Next week, we will get industrial production data for the Eurozone, with forecasts predicting a decline in September output despite recent progress. In a sign that employment remains a challenge, the Eurozone's unemployment rate rose from 12.0 percent in August to 12.2 percent in September, ranging from 4.9 percent in Austria to 27.6 percent in Greece. Retail trade also declined, down 0.6 percent in September. On the positive side, the ZEW Indicator of Economic Sentiment reflects the increase in relative optimism, with the balance of those anticipating improving economic expectations for the Eurozone rising from 24.9 percent in April (six months ago) to 59.1 percent in October.

The euro appreciated during the government shutdown, but the dollar has gained strength since then. The combination of better economic numbers worldwide (e.g., stabilization in Europe and Asia) and the budget impasse in the United States caused a sharp depreciation in the dollar in October. For instance, one euro exchanged for $1.3164 on September 3. The cost of one euro rose to $1.2534 on October 1, the first day of the government shutdown, jumping to a peak of $1.3810 per euro on October 24.

Since then, it has settled to around $1.34 per euro, still representing a bit of depreciation from midyear. As an example, the exchange rate was $1.2774 on July 9. This appreciation over the past few weeks was already in motion, but it picked up even more yesterday with the surprise announcement by the European Central Bank to lower its key interest rate to 0.25 percent. This action was taken because of Europe's sluggish growth rate combined with disinflationary worries.

Manufacturing activity in Asia continues to stabilize, with slow to modest growth overall. The HSBC China Manufacturing PMI increased from 50.2 in September to 50.9 in October. This was the third consecutive month of expansion, continuing the stabilization in the market since July. Faster growth rates for new orders (up from 50.8 to 51.5), exports (up from 50.7 to 51.3) and output (up from 50.2 to 51.1) pushed the data higher in October. Hiring shifted from modest contraction in September (48.8) to slightly positive in October (50.4). None of these figures suggest robust growth rates. The official government PMI data were somewhat higher, up from 52.1 to 52.3.

Real GDP in China has picked up from recent softness, with the annualized pace of growth increasing from 7.5 percent in the second quarter to 7.8 percent in the third quarter. These figures represent a longer-term deceleration in output, with real GDP down from its recent peak of 11.9 percent year-over-year in the first quarter of 2010. Yet, the economic stabilization in the third quarter has helped the manufacturing sector, increasing overall demand. Industrial production in August and September rose at an annual rate of 10.4 percent and 10.2 percent, respectively, which was faster than June's 8.9 percent pace. Investments in fixed assets by manufacturers have also moved higher, with the year-over-year rate of capital spending for the sector up from 17.1 percent in June to 18.5 percent in September.

Meanwhile, the Japanese economy continues to make progress, buoyed by Prime Minister Shinzo Abe's reforms. The Markit/JMMA Japan Manufacturing PMI rose from 52.5 to 54.2, expanding for the eighth straight month and growing at its fastest pace since May 2010. Rising sales (up from 55.5 to 56.7) and output (up from 53.8 to 57.7) fueled October's increase. Industrial production has seen moderate increases, up 1.5 percent in September and 5.4 percent year-over-year. Retail sales were also higher, with the annualized pace of growth accelerating from 1.1 percent in August to 3.1 percent in September. Motor vehicle production and sales were up strongly for the month.

Improved growth in China and Japan has helped the rest of Asia, with many key markets growing""notably, new orders, production and exports""albeit at a slow pace. This includes Hong Kong (up from 50.0 to 50.1), Indonesia (up from 50.2 to 50.9), South Korea (up from 49.7 to 50.2), Taiwan (up from 52.0 to 53.0) and Vietnam (unchanged at 51.5). One notable holdout continues to be India (unchanged at 49.6), which still saw output and sales contract even as export levels grew. This was the third consecutive monthly contraction for Indian manufacturing activity, which has decelerated year-to-date from a PMI of 54.7 in December.

The economic situation in emerging markets is also better. Stabilization in Europe and Asia has benefited emerging markets, with the HSBC Emerging Markets Index up from 50.7 to 51.7. The manufacturing PMI also extended its progress from last month, up from 50.4 to 51.1. In addition to the countries already mentioned, other emerging markets that saw growth included Brazil (up from 49.9 to 50.2), Czech Republic (up from 53.4 to 54.5), Poland (up from 53.1 to 53.4), Russia (up from 49.4 to 51.8) and South Africa (up from 49.8 to 51.5). Stronger new orders and production were keys to recent progress. Turkey (down from 54.0 to 53.3) has grown for three straight months, but its sales, exports and output levels eased slightly in October.

Growth in U.S.-manufactured goods exports remains frustratingly low. Despite progress in the larger trade deficit year-to-date, growth for U.S.-manufactured goods exports continues to be somewhat disappointing. During the first eight months of 2013, U.S.-manufactured goods exports equaled $786.14 billion (non-seasonally adjusted), or 1.8 percent higher than the $772.36 billion observed during the same time period last year. This represents a marginal improvement from July's 1.6 percent pace. Yet, it remains lower than the 5.7 percent growth rate in all of 2012 and well below the 15 percent rate needed to double exports by 2015, as outlined in the President's National Export Initiative .

Europe remains one of the weaker regions for export growth. Using non-seasonally adjusted data, year-to-date exports to the EU have fallen from $179.34 billion to $172.57 billion. The good news is that many of our largest trading partners saw gains, including Canada (up from $195.80 billion to $199.58 billion), Mexico (up from $142.87 billion to $149.46 billion) and China (up from $70.00 billion to $73.10 billion). Other regional data were mixed, with exports to the Pacific Rim countries essentially flat year-to-date (down from $248.90 billion to $248.39 billion), while exports to South America were higher (up from $118.66 billion to $122.57 billion).

The U.S. trade deficit changed little in August. The U.S. trade deficit edged slightly higher from $38.64 billion in July to $38.80 billion in August. So far this year, the trade deficit has averaged $39.73 billion, down from an average of $46.40 billion and $44.55 billion in 2011 and 2012, respectively. This suggests some improvement on the trade front year-to-date.

Between July and August, however, the data were not dramatically different. Goods exports were off from $132.69 billion to $132.44 billion, with goods imports down from $190.79 billion to $190.66 billion. The services trade balance was also mostly unchanged, with the services trade surplus down marginally from $19.46 billion to $19.42 billion. The petroleum trade deficit narrowed slightly from $10.30 billion to $10.20 billion. The petroleum trade deficit has become much smaller across this year as exports have increased and imports have fallen; the petroleum deficit in August 2012 was $13.73 billion.

Trade data had been delayed a few weeks due to the government shutdown. We are now expected to get September international trade data on Thursday, November 14. This will provide us with a good look at seasonally adjusted data through the third quarter.

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Manufacturers push for strong market-opening outcomes and high standards as TPP negotiations move forward. After 19 formal rounds of negotiations and numerous intercessional meetings, the United States and its 11 negotiating partners are working to conclude the TPP talks by the end of 2013. When completed, a final TPP would encompass a nearly $28 trillion market of almost 800 million consumers""or 40 percent of global trade. A comprehensive and high-standard TPP agreement could create important new opportunities for growing exports, expanding sales and increasing the competitiveness of manufacturers big and small throughout the United States. To achieve these objectives, manufacturers are strongly urging negotiators to achieve an agreement that will create concrete new market access, eliminate nontariff barriers, level the playing field and set strong standards to enhance the competitiveness of manufacturers throughout the United States on issues from intellectual property and investment to cross-border flows and state-owned enterprises. Negotiators from the 12 TPP countries are meeting around the clock and holding focused discussions on a number of key issues, including intellectual property, investment, procurement, rules of origin, state-owned enterprises and others. TPP chief negotiators will meet in Salt Lake City November 19-24 to discuss key issues, and TPP trade ministers will meet in Singapore December 7-9.

Policymakers work to renew TPA. Congressional leaders are keeping hope alive for introduction and potential action on a bipartisan TPA bill in 2013. For months, the chairmen and ranking members of the Senate Finance and House Ways and Means committees""the so-called "big four"""have been working to craft a TPA bill that can attract broad support on both sides of the aisle. At an October 30 Senate Finance Committee hearing , Chairman Max Baucus (D-MT) said he still hopes to see TPA legislation unveiled before the end of this year. TPA facilitates timely action and input on trade agreements that open overseas markets to U.S. goods, services and investment. The United States Trade Representative (USTR), Ambassador Michael Froman, and the USTR team are also making passage of TPA a top priority. A strong executive-congressional partnership will be essential for congressional approval of the TPP, the Transatlantic Trade and Investment Partnership (T-TIP) and other deals the United States is negotiating with partners in the Asia-Pacific region, Europe and beyond. The National Association of Manufacturers (NAM) is working to build broad support for TPA on Capitol Hill, including through leadership in the Trade Benefits America coalition. Last month, the NAM's Executive Board passed a resolution urging the Administration and Congress to work together expeditiously to renew TPA. You can see the NAM's TPA priorities and keep track of the latest developments on this critical issue on our new TPA webpage .

USTR announces second and third rounds of T-TIP negotiations. USTR has announced two upcoming negotiating rounds of the T-TIP. If successful, this trade agreement between the United States and EU could drastically reduce the cost of doing business across the Atlantic for manufacturers by eliminating tariffs and cutting regulatory barriers to trade. The first negotiating round was held in Washington, D.C., in July. The second round, which had originally been scheduled for early October, was postponed due to the federal government shutdown and has been rescheduled for November 11-15 in Brussels, Belgium. Topics expected to be covered include energy, investment, raw materials, regulatory issues and services. The USTR also announced that the third round of talks has been scheduled for December 16-20 in Washington, D.C. The USTR has posted additional details and registration information for these rounds on its website .

Manufacturers work across the Atlantic to promote strong transatlantic trade secrets protection. Last month, the NAM joined BUSINESSEUROPE and the Trans-Atlantic Business Council on a letter urging top U.S. and European trade negotiators to ensure strong trade secrets protection and enforcement commitments in the T-TIP. The letter to USTR Froman and EU Trade Commissioner Karel de Gucht states that trade secrets can account for up to 80 percent of the value of a company's intangible assets. However, the legal protections for such information are generally much weaker compared to other intellectual property rights, making them highly vulnerable to theft. The NAM and its European partners called on negotiators to "ensure relevant U.S. and EU laws reflect best practices for protecting trade secrets," including civil and criminal remedies. The NAM will continue pressing for strong protection and enforcement of trade secrets and other intellectual property rights in the T-TIP, both to ensure that the agreement reflects the highest standards and to provide a possible model for other countries looking to strengthen their laws.

WTO agreements remain elusive with Bali Ministerial Conference looming. The WTO will meet in Bali, Indonesia, for its Ninth Ministerial Conference in early December. WTO Director-General Roberto AzevÃªdo is pressing WTO members to agree on a package of concessions on trade facilitation, information technology, least-developed country food issues and other topics. The WTO Ministerial Conferences, which have been held about every two years following the establishment of the WTO in 1995, have been instrumental in moving negotiations and policies forward.

AzevÃªdo pushed the deadline for the completion of the package back by one week to November 21. Progress on negotiations has reportedly increased over the past few weeks, but large gaps between member countries still remain on elements of trade facilitation, agriculture and development. Earlier this year, the NAM sent a coalition letter in support of the WTO Trade Facilitation Agreement , with 16 associations from around the world joining as cosigners.

The WTO is also considering expanding the Information Technology Agreement (ITA), which provides duty-free treatment to certain high-tech goods. More than 250 high-tech products have been proposed for coverage, but several WTO members have requested special treatment on products in sensitive sectors. ITA expansion negotiations stalled in July when China produced an extensive list of "sensitive" items it hoped to exclude from coverage, but resumed in October. The NAM joined a diverse coalition of businesses and business groups earlier this year to renew our call for a meaningful expansion of the ITA. The agreement has helped to drive innovation, accelerate productivity, increase employment, lower consumer prices and bridge communities across the globe since its enactment in 1996. An expanded ITA could bring an additional $400 billion in high-tech trade under its coverage and increase world GDP by $190 billion.

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Upcoming trade missions seek to open opportunities for manufacturers. The U.S. government, in keeping with the National Export Initiative , is committed to sponsoring trade missions focusing on the most innovative and competitive sectors of the U.S. economy. Coming up in 2014 are trade missions to India, Singapore, Taiwan, Japan, Korea and Turkey.

Healthcare Trade Mission to India : January 27-February 1, 2014
Contact Koreen Grube at (414) 297-1853 or Koreen.Grube@trade.gov . Application deadline is November 22.

Aerospace Executive Trade Mission at Singapore Air Show: February 2014
Contact Jason Sproule at (949) 660-1688 or jason.sproule@trade.gov or Howcheng Ng at +011 (65) 64760-9037 or Howcheng.Ng@trade.gov . Application deadline is November 30.

Travel and Tourism Trade Mission to Taiwan, Japan and Korea : March 9-14, 2014
Contact Anastasia Xenias at (212) 809-2685 or Anastasia.Xenias@trade.gov or Frank Spector at (202) 482-2054 or Frank.Spector@trade.gov .

Healthcare Trade Mission to Turkey : May 4-8, 2014
Contact Jessica Dulkadir at jessica.dulkadir@trade.gov or Michelle Ouellette at Michelle.Ouellette@trade.gov . Application deadline is December 13, or until all spaces are filled.

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