The global economy has been slowing since the prices started surging higher early last year and central banks followed up with higher interest rates, both of which have been a burden for the global economy, particularly Western countries. Manufacturing was the first sector to slide into recession and has been hit the hardest while other sectors are following suit.
However, this week we saw some promising signs, starting with the Chinese manufacturing PMI indicator which increased to 49.7 points in August from 49.3 in July, beating expectations of another slowdown to 49.1 points. This improved the sentiment somewhat, after the problems we have seen in the Chinese economy recently.
On Friday we had the Caixin Manufacturing PMI from China again, which came in even better. Expectations were for a decline to 49.0 points from 49.2 in August points in July, but this indicator jumped to 51.0 points. This shows that this sector might have left contraction behind, which is a great signal. Later on in the US session we also had the ISM manufacturing, which showed an improvement to 47.6 points last month from 46.4 in the previous month, as shown in the report below. Although, these are just signs since the global economy is still slowing. But, traders are already building their hope so let’s wait for more data.
ISM Manufacturing PMI for August 2023 Highlights
- August ISM manufacturing PMI 47.6 points vs 47.0 expected
- July manufacturing PMI was 46.4 points
- Prices paid 48.4 points vs 43.9 expected. Last month was 42.6 points
- Employment 48.5 points vs 44.2 points expected. Last month was 44.4 points
- New orders 46.8 points vs 47.3 points prior
- Prior report 46.4 points
- Prices paid 48.4 points vs 43.9 points expected. Last month 42.6 points
- Employment 48.5 points vs 44.2 points expected. Last month 44.4 points
- New orders 46.8 points vs 47.3 points prior
Manufacturing has been in a recession for some time but there are some green shoots. I suspect this survey is going to be a mess for the next few months because it looks like an autoworkers strike is coming. Bonds were sold off on this report, in part because of the jump in prices paid. I don’t think that should have been a surprise given energy prices. So, the USD ended the day up on Friday.
Comments in the ISM report:
- “Further reductions in customer orders due to the economic situation and also their working down of own inventories. Backlog is dwindling, but still showing robust revenue.” [Computer & Electronic Products]
- “Demand still weak. Customer inventories are getting depleted; however, we are not seeing a real uptick in demand. General supply conditions are softening.” [Chemical Products]
- “Still seeing a slowdown in orders. We’re continuing to ship to max capacity, with supply constraints still a real part of our day-to-day business operations.” [Transportation Equipment]
- “Customer orders have softened. This is likely due to customers’ increased confidence in the supply chain, (which) has them reducing their inventories. Customers are also being pinched with higher interest rates. Additionally, consumers are feeling their purchasing power eroded by stubbornly high inflation, so they are purchasing less.” [Food, Beverage & Tobacco Products]
- “Fourth quarter orders falling short of projection and indicating a slowdown in customer demand, though the first quarter forecast remains solid. Unclear if this is an inventory correction. Logistics stabilized and costs are matching 2019. Shortages limited to only a few items now, but suppliers are hesitant to add or replace labor needed in light of slowing demand.” [Fabricated Metal Products]
- “General slowdown in business at the end of the third quarter. For capital equipment additions, our customers are buying only what they need for specific jobs and not adding any capital fleet material for potential future work.” [Machinery]
- “There is additional softening in the market. Customers are hesitant to provide extended forecasts with today’s economic uncertainty.” [Electrical Equipment, Appliances & Components]
- “Business continues to remain strong with sales and profits both ahead of plan. The bookings were below what we planned, but that was expected due to fewer working days and summer vacations.” [Miscellaneous Manufacturing]
- “The manufacturing sector continues to be slow, and the low market prices make it difficult to stay profitable. On the positive side, laborers are showing enthusiastic employment interest. Rising energy and fuel prices are of concern to our company.” [Paper Products]
- “Business is beginning to improve moderately. Still well below 2022 levels, but it appears that the ‘great inventory rebalancing’ is finally coming to fruition.” [Plastics & Rubber Products]
- “Automotive volume remains strong in preparation for the United Auto Workers’ potential strike at Ford, General Motors and Stellantis. Contingency plans in place for sub-tiers. Continue to have issues recruiting general labor employees. Operational efficiency suffering due to a lack of human resources. Order book remains strong and ahead of 2022.” [Primary Metals]
- “(The Federal Reserve’s) actions to increase borrowing costs has dampened demand for residential investment. Recently, this slowdown plateaued somewhat, with demand stabilizing. The outlook for 2024 remains uncertain, and we continue to be cautious about building inventories.” [Wood Products]
The inventories metric is an interesting one as it makes new lows:
The manufacturing sector has been experiencing a prolonged period of economic downturn, often referred to as a recession. However, there are some emerging signs of improvement or “green shoots” in this sector. Nevertheless, there is concern that these positive trends may be disrupted in the coming months due to the possibility of an autoworkers strike.
The anticipation of such a strike could create uncertainty in the manufacturing industry, potentially leading to disruptions in production, supply chains, and overall economic stability. This uncertainty may manifest in economic surveys, making it challenging to gauge the true state of the manufacturing sector in the near future.
Regarding the bond market’s reaction to this situation, it appears that bond prices are falling (selling off). One of the factors contributing to this sell-off is the reported increase in prices paid within the manufacturing sector. This may not come as a surprise, especially considering the recent surge in energy prices. Rising input costs in manufacturing can put pressure on profit margins and contribute to inflationary concerns in the broader economy.
Read More: Manufacturing Showed Signs of Improving This Week