What is happening to first world manufacturing?

The last 24 hours or so have given us a few reminders of the ongoing problems that world manufacturing faces. This also reminds us of the shift that has taken place over time from businesses which make things which are clearly measurable such as cars and white goods to those in the service sector where output is more ephemeral and consequently more difficult and so far sometimes impossible to measure. One side-effect of this trend especially if we look at the virtual world is that output for numbers such as Gross Domestic Product becomes even harder to measure with any hope of accuracy. UK readers may be having a wry smile at the concept because they have been subject to a barrage of official rhetoric in the opposite direction. This began with the “rebalancing” claims of the former Bank of England Governor Mervyn King and more latterly the current Chancellor George Osborne coined the phrase “march of the makers”. These Open Mouth Operations have found themselves filed under a sub-section of “never believe anything until it is officially denied”.

The United States

Yesterday came news which made quite a few people sit up and listen. From the Institute of Supply Management.

Economic activity in the manufacturing sector contracted in November for the first time in 36 months, since November 2012,

Okay so let us take a look at the detail of this.

“The November PMI® registered 48.6 percent, a decrease of 1.5 percentage points from the October reading of 50.1 percent. The New Orders Index registered 48.9 percent, a decrease of 4 percentage points from the reading of 52.9 percent in October. The Production Index registered 49.2 percent, 3.7 percentage points below the October reading of 52.9 percent.

So we see a lower number and if we look forwards it is hard to avoid the thought that prospects are not good if you note the substantial fall recorded in new orders. You may be wondering about the positive car sales numbers which were also released? Well they seem to have been included here “Automotive remains strong.” Also I note that the import quotient was up which will provoke thoughts of the likely impact of the stronger dollar.

Readers and the US Federal Reserve (with its interest-rate rise hints and promises) will be mulling the overall impact of this and ISM has a go itself.

In addition, if the PMI® for November (48.6 percent) is annualized, it corresponds to a 1.7 percent increase in real GDP annually.

That raises a wry smile as they are also proclaiming the decline of manufacturing as the clear implication is that the economy grows in spite of it shrinking. According to them it still grows down to 43.6 on the manufacturing ISM scale. They are not quite aligned with the Atlanta Fed GDP nowcast.

The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the fourth quarter of 2015 is 1.4 percent on December 1, down from 1.8 percent on November 25.

Will the overall Federal Reserve be singing along to 10cc on December 16th?

I didn’t do it, I wasn’t there
I didn’t want it, I wouldn’t dare

The official numbers

The irony is that the official US manufacturing figures had been better recently after a weak start to 2015. The 1% rise in July made a decent third quarter and October saw a 0.4% rise. But of course the July numbers were accompanied by this bombshell.

The rates of increase in manufacturing from 2011 through the first half of 2015 are now lower than reported earlier, particularly for 2012 and 2013, the years for which the majority of benchmark data became available.

 

The downwards revisions exclude some high-tech industries where the numbers are oddly troubled and reduced 2012 by 1.7%, 2013 by 1.6% and 2014 by 0.5%. They also implied the full data set for 2014 was not yet in, begging the question if it might also see a more substantial revision.

Also we have to allow for this.

The base year for IP was advanced from 2007 to 2012, which raised the level of the index in all periods.

Do not misunderstand me there has been a recovery in US manufacturing but it is not the poster boy/girl people thought it was and we have had a hint it may be slowing.

China

This has been a news story for 2015 so let me just pick out a highlight from yesterday’s Markit purchasing manager’s index report.

The health of the sector has now worsened in each of the past nine months. However, the latest deterioration was the weakest seen since June.

They report a stabilisation but with their measure at 48.6 then a mild contraction is being reported. This is of course at odds with the official numbers but seems to be confirmed with other information such as shipping data and commodity prices.

Canada

Yesterday’s GDP data was a curates egg and you can choose the monthly fall of 0.5% or the annual rise of 2.3%. However there was also this.

Manufacturing output decreased 0.6% in September, after three consecutive monthly gains.

This made it some 0.9% lower than a year before and backs up this from the earlier manufacturing release.

Constant dollar manufacturing sales were down 1.6%, indicating that the volume of goods sold was lower in September.

Australia

The good news for the land “down under” this morning was that GDP rose by 0.9% on a quarterly basis driven by net exports being up by the equivalent of 1.5% of GDP. But even here we see this.

Manufacturing (-0.1 percentage points) was the largest detractor in trend terms. (annual numbers and effect on GDP).

In terms of comparison with a year ago manufacturing was down by 0.9%.

The UK

The mood music from the UK’s own PMI survey for manufacturing was good yesterday albeit not as good as the previous month.

The UK manufacturing sector maintained its positive start to the final quarter, with November seeing growth ease only moderately from the recent peak attained in the prior survey month.

Okay but of course the picture here has been troubled.

as it starts to reverse the losses sustained in the prior quarter……it positions manufacturing as less of a drag on the broader economy.

Less of a drag is hardly “march of the makers” territory is it? The official numbers were good if we look back a year or so ago but now we have this.

Manufacturing, the largest component of production, is estimated to have decreased by 0.4% between Quarter 2 (Apr to June) 2015 and Quarter 3 (July to Sep) 2015.

So if we have a solid final quarter will we simply be back to where we were at the half-way point of 2015? This provides a reminder of how far away we are from regaining the previous peaks.

In the 3 months to September 2015, production and manufacturing were 9.3% and 6.4% respectively below their figures reached in the pre-downturn GDP peak in Quarter 1 (Jan to Mar) 2008.

One section that seems set never to do so is steel production after the recent news.

Looking at the underlying index we are at 101.7 where 2012=100 or the UK economic boom has bypassed manufacturing by.

Comment

There are all sorts of issues to consider here. In the first world we have not only had relative decline in manufacturing we have also often had absolute declines as well and my home country is on both lists. We are becoming ever more a service economy in the UK and that trend seems to be on the march in plenty of places. As there is a limit to the goods that can be produced I guess that was always going to be a consequence of economic growth and development. But following the credit crunch impact which hammered manufacturing output we are also seeing issues in what are recorded as much better times. Has in some way the QE  era contributed here?

There are factors to account for as there will have been a depressionary impact on manufacturing from lower oil and commodity prices. For example numbers in the UK,US and Canada will have been affected by lower oil and gas prices in particular especially in the shale sector. But then of  course you have to subtract their upwards influence in 2012,13 and early 2014 as well! Also the latest numbers from Australia record a boost in mining output which is quite a triumph when you look at the prices received.

Some of this is no doubt a shift to countries with cheaper labour forces but there seems to be a bit of a tectonic plate shift as well. Or as my Dire Straits musical reference of October 7th put it.

He wrote me a prescription he said ‘you are depressed
But I’m glad you came to see me to get this off your chest
Come back and see me later – next patient please
Send in another victim of Industrial Disease

 

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17 thoughts on “What is happening to first world manufacturing?

  1. Mr Politician, please choose:
    1) Investment in manufacturing, where real things are made by people with real skills, and where the income from sales of goods benefits all of the economy.
    2) “Investing” in the financial sector where people with supposed, nebulous, skills we cannot define, basically gamble all day on the value of nebulous products, and where the income benefits none bar a few within one sq. mile of the country.
    (NB; No2 pays huge, corrupt, post-career sinecures)

    • No 2 also makes large donations to political parties, although I expect that this is just coincidence!
      I used to work in the City (now do real job) and not only is everything said abut the City being useful utter nonsense, it is not just the gamblers (trading desks of banks, hedge funds) who take home dazzling salaries, but:
      1. Lawyers
      2. Accountants
      3. Headhunters
      4. Fund managers
      5. Insurance brokers
      6. Management consultants
      The only reason why these people earn such gigantic rewards and get away with it is that they are taking modest (ish) percentages of giant amounts of money or are so far from the consumer that no-one knows or notices. The problem is that it is not their money. It is either balance sheet money or our savings in one form or another (which is why we get such awful pensions after they have taken exorbitant fees).
      How on earth can manufacturing ever become important when the salaries of the City are so much greater? If you go to our best universities, the science graduates are hovered up into the City rather than going to do something useful.
      Rant over.

    • More banking is done in Canary Wharf and banking subsidies also benefit RBS in Edinburgh, not just London’s square mile.

      Politicians have an awful track record and should not be allowed to invest in any business. Just look at all the RBS losses, the politicians who claimed it was worthwhile should be asked to buy RBS with their OWN cash …..

      Agree with your last point, need I say Tony B Liar http://www.telegraph.co.uk/news/politics/tony-blair/11328929/Tony-Blair-cuts-his-tax-bill-despite-another-bumper-year.html what an immoral dishonest scumbag – expects ordinary professional workers to pay 40% income tax etc whilst dodging tax and lecturing us about social justice.

  2. Hi Shaun

    One thing you did not mention and that is outsourcing by home manufacturers of “back office functions such as cleaning, IT, Finance etc to home service providers. This has been going on for some time and I assume the outsourced functions would indeed augment the services sector ( and be recorded as such) and reduce manufacturing;nevertheless such items are really part of the manufacturing nexus rather than services.

    What this means is that the decline in manufacturing is more apparent than real but as manufacturing is transferred overseas, as has happened in the last twenty years, this not only affects what we call “manufacturing” but also services as some of the outsourced services will also disappear abroad.

    Whilst some of the trend to services and away from manufacturing may be regarded as “natural” I think much of the decline in UK manufacturing is in fact “unnatural” and should not have taken place. Ricardo’s Theory of Comparative Advantage is not stated in a “winners” or “losers” terms but what we call globalisation is just that: a winners and losers situation based on the arbitrage of international labour costs. If Ricardo were alive I suspect he would be horrified.

    Clearly the recent strength of the £ has not helped, especially against the Euro.

    • Hi Bob J

      You make a very good point about whether we are comparing like for like in terms of our definition of manufacturing output compared to past definitions. I am sure there is something in what you say and maybe a quite significant amount. What might we call it definition creep? I will give some thought as to how to check on this but am reminded of a big shift earlier this year (more than £1 billion) which took place from construction to services in UK GDP.

      Also whilst I am a fan of free trade it is far from a free trade world and the sale of companies like Cadburys bothers me and not just because the formula for some of the chocolate was then changed!

  3. Great column, Shaun, as usual.
    As you wrote, yesterday’s GDP release for Canada was a bit of a curate’s egg. Nevertheless, if one uses quarterly GDP to define recessions and recoveries, the Canadian economy fully recovered from the 2015H1 contraction in 2015Q3, whose real GDP level lies above the 2014Q4 peak. With revisions to monthly GDP, it now seems that the Canadian economy fully recovered all lost output for the five months from January to May in the three months from July to August. True enough, there was a relapse in September, but a lot of this was due to a one-off shutdown of operations at oil sands plants; these will be open again in October. There was almost certainly growth in October; the October real GDP update will be released on December 23.
    “Constant dollar manufacturing sales” is how StatCan references its volume estimates of manufacturing sales, and the database refers to “real manufacturing sales…2007 dollars”. However, the online documentation more correctly refers to these estimates as “at 2007 prices” since they use manufacturing-related deflators to obtain a volume measure:
    http://www23.statcan.gc.ca/imdb-bmdi/document/2101_D3_T2_V143-eng.pdf
    The US Bureau of Economic Analysis (BEA) is careless about terminology, and speaks of “constant dollar estimates” where UN standards would dictate “estimates at constant prices”. Mostly StatCan follows international standards, but there has been a lot of backsliding.

    • Hi Andrew and thank you

      I do take an interest in both Canada and Australia but have done so more this year because we have about as near as we are going to get of a test tube experiment of lower commodity prices on a producing economy. Also economies where they are important but far from everything. Canada has done pretty well considering but Australia seems to have just shrugged it off. I will have to investigate further I think.

      As to the “one-off” impact that hit the North Sea oil and gas production in 2014 where major maintenance is on a 3 year cycle. This means that recorded output has surged in 2014 just when you might think it should be lower….

      In what way do you think that StatCan has been backsliding?

  4. hello shaun,

    Theres also the point that the MFG base here is mostly owned by overseas investors , either companies or countries

    the profits are for them, not us

    So we pump up , Gerry Mander the figures and give big bucks

    kinda reminds me of the Eastern Roman Empire and its decline ….

    GNP still not good either , is it ?

    Forbin

    • Hi Forbin

      Some foreign investors have been good such as Nissan and the Indian investment in Jaguar Land Rover has been going well. So it is hard to say especially as some of our own management is shabby. However as you infer there are more problematic foreign owners such as those who took over Cadbury who now seem to be selling it off.

      There is a general problem where shareholder time spans bear little relation to how long it takes to bring a substantial manufacturing project to fruition.

      Meanwhile Brent Crude is below US $43 tonight.

  5. I find Donald Trump a colourful character and I do not agree with a lot of what he says but one point he makes is true even though I don’t agree with argument he uses it to support.

    We put restrictions on our own companies in terms of environmental damage and the rights they must give employees. This makes their products more expensive.
    The Chinese and other economies do not do this and so produce cheaper products which people then buy as, en masse, the general public only care about sticker price.
    Unless we ban their products or add large import tax then our manufacturers cannot cope. Or we abandon 100 years worth of progress on labour laws and trash the environment.

    My own personal opinion is that we should consider some form of protectionism. Even if you don’t care about manufacturing in the UK we should surely be concerned about the operational and security risks of having so few people producing key items. A huge proportion of the world’s hard disk drives are made in Thailand for example. What happens if something happens to the factory and supply is stopped and what do we do if they are putting code in hardware that allows recording of our data ( not as paranoid as you might think if you have seen what GCHQ did to the Guardian newspaper’s Snowden laptop ).

    • ” A huge proportion of the world’s hard disk drives are made in Thailand ”

      Actually that did happen 🙂

      caused “inflation ” in disk drives for a while …

      Forbin

    • and I totally agree with you on the Globalization issue – when making these agreements it must have been plain to all what the effect would be

      it made the Rich better off and stuff the enviroment !
      ( and your local workforce – stuff ’em ! )

      It was sold under the pretense that global trade would benefit all as cheaper prices would off set any loss of jobs , etc .

      The real results are covered up and frankly the general public couldn’t give a toss if that T-shirt or trainers was made by a 10 year old in a sweat shop in Bangladesh or China

      Why ? well for some reason they thought that these countries had laws such as ours ……. cant think why but if you corner one of ’em …….

      ” I didn’t know , did I ? ”

      and

      ” well what am I suppose to wear ? what ? at that price ?? booger off ! ”

      and the top 0.1% again walk off with all the loot …..

      Forbin

    • Driver software an be sourced independently from the hardware manufacturer, and you can write your own driver software on linux. Code in the hardware – use factory code at your own risk.

      The supply chain risk is a valid concern !

  6. Hi Shaun, I’ve only just started reading this and am skimming through quickly but wanted to make the point that I stated on here a while ago that US narrow money had been collapsing since about May so the manufacturing numbers are no surprise to me which was the point I was making at the same time a while ago when everyone was criticising the Fed for dithering over a raise.

    They are faced with collapsing money supply and a probable downturn in the Kitchin cycle in 20016, then there’s the Juglar cycle with a downturn due sometime in 2015 – 2019. If they raise with collapsing money supply going into a Kitchin downswing well……and we already have evidence of the downswing which I was expecting in the US manufacturing numbers.

  7. Back again – “we have had a hint it may be slowing.” never mind a hint – money supply has been screaming this once we had 3 consecutive months of falls (May June and July) and its’ still falling so expect worse to come plus the Kitchin cycle going negative next year despite employment trends. I am now beginning to question one of your themes that employment is a leading indicator.

    • Hi Noo2

      The employment numbers have had a pretty solid run in the credit crunch era but maybe they work better at different parts of the cycle. The fear is that like the PMI numbers which back in the early stages had a good run they end up with some of the features of Goodhart’s Law applied. A different form of peak employment….

      As to the Federal Reserve it now faces something of a dilemma and today’s ADP report does not add a lot as it mostly tells us what the non-farm payrolls have already let us know.

      Also there are always fears that the numbers may be telling us the wrong thing as well as the fear that the Fed may act and then the US economy turns down. I was postulating earlier that if we do get a rate rise we could see QE5 in the spring/summer of 2016.

  8. “if we do get a rate rise we could see QE5 in the spring/summer of 2016.” Yes I think you’re right. How effective and “in command” would the Fed look then!

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