The JPMorgan Global Manufacturing Purchasing Managers’ Index™ (PMI™), compiled by S&P Global, fell from 51.1 in July to 50.3 in August, its lowest since June 2020.
Output increased in only ten of the 30 economies for which data are available. available, and in five of them – including mainland China – the gains were only marginal. Production losses were recorded in the United States, the euro zone, the United Kingdom and Japan.
The survey’s sub-indices, explored later in this document, point to a deterioration in the production trend in the coming months. Most notably, new orders continued to fall at an accelerated pace in August, and inventory levels continued to rise amid weaker-than-expected sales.
There was, however, encouraging news on the inflation front, as weaker demand and improving supply led to a marked easing of price pressures in manufacturing, the binding power prices passing from sellers to buyers.
Global factories poised to ramp up
The Global Manufacturing PMI Survey Production Index, which acts as a reliable leading indicator of actual global production trends several months ahead of comparable official data (see Chart 2), signaled a marginal decline in global industrial production in August, the third such drop in the last five months.
However, although modest at present, the slowdown is expected to accelerate in the coming months given the marked deteriorations in other survey variables. More importantly, the ratio of new orders to inventories, a useful guide to near-term production trends, fell further in August, falling to a level which, besides the first months of pandemic lockdown, was the lowest. since April 2009, at the height of the global financial crisis.
Only one in three economies report rising production
It should also be noted that, while the modest drop in production seen in April and May was largely due to COVID-19 related containment measures in mainland China, the drop in August is broader. Of the 30 economies for which S&P Global PMI data is available so far for August (Vietnam is released on September 5), only ten reported an increase in output. Moreover, of these ten, only marginal gains were seen in five countries. In fact, production only increased noticeably in Thailand and India, although small but significant gains were seen in Colombia, Indonesia and Russia (the latter benefiting from a rebound in domestic demand ).
Meanwhile, output fell particularly in the UK, where the loss was only exceeded by declines in Taiwan and Poland, as well as in the euro zone. Moderate declines were seen in the United States and Japan, while growth in mainland China slowed near a standstill after two months of post-lockdown rebound.
Orders fall faster than production as global trade slumps
To better understand the short-term trajectory of manufacturing output, we must first assess the health of current demand, and in this regard, the latest data from the PMI survey showed that new order entries were declining at a accelerated pace in August. The decline was actually one of the largest seen in the past decade, although far less than the declines seen in the early stages of the pandemic, and – importantly – exceeded the decline in production. This divergence between production and new orders over the past few months (see chart 5) suggests that, absent a sudden pick-up in demand, manufacturers will have to further adjust their production downwards in the coming months. depending on the new lower demand environment.
The deteriorating demand picture can in part be attributed to an increasingly pronounced slowdown in global trade, as measured by the global PMI of new export orders, which correlates well with official trade statistics. , which are only available with a significant delay.
Chart 6 shows the predictive power of PMI data on export orders relative to global trade and indicates that trade flows fell in August at a pace not seen since the 2012 debt crisis (excluding the first few months of the pandemic).
Export losses were recorded in August in the United States, the euro zone, the United Kingdom, Japan and mainland China. In fact, only India, and to a lesser extent Australia, recorded export growth in August.
Dig deeper into the survey data and the worrying signals start to multiply. Two key indicators in particular point to excess capacity building in the manufacturing sector, reflecting weakening demand in recent months.
First, order books (work in progress but not yet completed) fell for a second consecutive month. This contrasts sharply with the record increases in backlogs seen during particularly busy periods over the past two years, which in turn reflected demand exceeding production capacity. In recent months, there has been a reversal of this trend, with production capacity now exceeding demand, allowing companies to reduce their backlogs.
Second, inventories of finished goods rose in August at a pace not seen since comparable data became available in 2009, building on an earlier record gain in July. This inventory accumulation primarily reflects lower-than-expected sales and shipments to customers, rather than a deliberate build-up of inventory, according to anecdotal evidence provided by contributors to the survey.
Such an accumulation of inventories, coupled with the reduction in the backlog of work, suggests that companies will adjust their production downwards in the months to come.
Commodity purchases fall due to unexpected inventory accumulation
Stocks of raw materials and other inputs are also growing at a rate rarely seen before the pandemic. However, as input inventories rose in 2021 due to deliberate stockpiling as growers focused on supply chain resilience, in recent months a growing number of companies have reported that inventories were now rising due to lower than expected utilization in production, in turn linked to disappointing sales levels.
In fact, inventories are now rising despite producers reducing purchases of inputs, highlighting how low production levels mean warehouses are filling up with unused raw materials.
Prices rise at slowest pace in 20 months as supply constraints ease
One consequence of the recent decline in demand for goods and the accompanying decline in demand for inputs from manufacturers has been an easing of supply constraints. Reports of longer delivery times for suppliers fell globally in August to a 22-month low, with the incidence of delays well below that seen for most of the period pandemic recovery.
With demand falling and supply constraints easing, there has been a commensurate cooling of pricing pressures, as chart 9 clearly shows. Many suppliers are offering better rates in order to sell unsold inventory to manufacturers and manufacturers themselves – often encumbered by high levels expected. inventory – are now often reluctant buyers.
Pricing power shifts from sellers to buyers
Likewise, manufacturers are increasingly willing to cut prices to win sales in an increasingly difficult demand environment. As a result, average prices received for goods leaving the factory rose at the slowest pace in a year and a half in August. Strong moderations in retail price inflation rates were evident in the US, Eurozone and UK, as well as in Japan, with prices even continuing to fall in mainland China.
In short, pricing power is shifting from sellers to buyers as the manufacturing sector faces a period of declining demand and reduced production.
Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.