Global Manufacturing PMI Dips: Is That of Concern?

With trade-led slowdown, global Purchasing Managers’ Index (“PMI”) has dipped to 49.8 in May, lowest since October 2012. Manufacturing declines were reported in Europe, U.K. and Japan. The biggest drop was seen in the U.S., where PMI fell to its lowest since 2009. This was according to IHS Markit, following the headline JP Morgan Global Manufacturing PMI.

  

The deterioration contrasts markedly with robust growth indicated this time last year, the PMI having lost ground almost continually since peaking in December 2017.

The survey's output and new orders indices both sank to their lowest since October 2012. Falling export orders again fuelled the downturn, dropping for a ninth straight month to signal a further deterioration in global trade flows, according to IHS Markit.

The survey data showed trade growth deteriorated from a peak in January 2018. This is amid rising concerns over trade wars.

The drop in new orders meanwhile meant firms increasingly ate into previously-placed orders to support production. Backlogs of work consequently fell at the joint-fastest rate since December 2012, down for a fifth consecutive month.

Falling backlogs of work suggest development of spare capacity in the manufacturing sector. The existence of spare capacity tends to have two consequences.

First, firms typically seek to scale back operations to remove slack, often resulting in job cuts. Jobs were culled globally in May, albeit only marginally, for the first time in almost three years.

Second, prices tend to come under downward pressure amid spare capacity. Such a trend was seen in May, with input costs rising at the slowest pace for nearly three years as more suppliers offered discounts.

What does this mean?

Any business/entrepreneur need to conserve cash, diversify portfolios, seek new markets and prepare for the worst. The key point to watch is whether the dip is a sustained drop or just a “blip” over a shorter period. One thing is for sure, prolonged trade wars will impact manufacturing and services and it is in the best interests of rational deal makers to find a way forward in fulfilling. “The Art of the Deal”!

Reference:

Chris Williamson, Global manufacturing PMI slides to lowest since 2012 https://ihsmarkit.com