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.
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.
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.
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 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.
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