This morning has seen some developments in a theme which has been building up over the past year or so. It is the issue of how production and particularly manufacturing is struggling in quite a few parts of the first world. Back on the 2nd of December last year I put it like this.
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
I pointed out back then that this may be the beginnings of something of a post industrial society as economies move towards the service sector. In the UK this “rebalancing” has been particularly pronounced in the credit crunch era albeit that it has moved in exactly the opposite direction to that promised by the former Bank of England Governor Baron King of Lothbury.
Production output fell between 2011 and 2013 to below levels seen at the height of the downturn in 2009……..Although there has generally been growth across all major components of GDP since the start of 2013, the services industries remain the largest and steadiest contributor to economic growth.
If we take the first quarter of 2008 as our benchmark then services are at 112.6 whilst production is at 90 and manufacturing at 93.2. The numbers speak for themselves and there is a particular irony in production actually falling as Baron King was trumpeting exactly the reverse as a result of the fall in the UK Pound £ ( circa 25% in around 2008) he was so keen on. As we assimilate this then we are left with the thought that by now services must be 4/5 ths of our economy as the 78.6% official estimate is from 2012. Oh and speaking of assimilation is the service sector like this?
We… are Borg. You will be assimilated. Resistance is futile.
For the UK the latest official data for manufacturing is for February and it told us this in annual terms.
The largest contribution to the fall came from manufacturing, which decreased by 1.8%. This was the largest fall since July 2013, when it fell by an equal amount.
The mood music or business surveys are sadly hammering out the same beat as we see below.
The UK Manufacturing PMI fell below its critical 50.0 mark for the first time in over three years in April…….On this evidence manufacturing production is now falling at a quarterly pace of around 1%.
This was a particularly interesting addition to the list as the official data was as follows.
In March 2016,production in industry was down by 1.3% from the previous month on a price, seasonally and working day adjusted basis according to provisional data of the Federal Statistical Office (Destatis). In February 2016, the corrected figure shows a decreased of 0.7% (primary –0.5%) from January 2016.
If we look to the underlying index we see that rather than the expected growth it at 109 in March is only just above the 108.8 of March 2015 showing that on current trends there is a danger of year on year falls. This is significant because as you can see from the 9% growth since 2010 until now German manufacturing had been rumbling forwards.
As to the business surveys well they are downbeat too.
the German manufacturing sector remains stuck in a low gear at the start of the second quarter. (Markit)
La Belle France
The statistics office was up early to tell us this.
In March 2016, output decreased sharply again in the manufacturing industry (-0.9% after -1.4% in February)…..Over the first quarter of 2016, output diminished in the manufacturing industry (-0.7% q-o-q)
This is becoming a familiar state of play although there are individual differences as for example annual growth in France remains more positive at 0.9%. Although over the credit crunch era it has not done as well as Germany as growth since 2010 has been a mere 1.2%. If we move to the Markit business surveys we get more gloom.
“The French manufacturing sector slipped further into contraction during April, precipitated by a steeper reduction in new order intakes.”
The bad news just keeps on coming here as you can see from this morning’s official communique.
Manufacturing production decreased by 2.5% (working day adjusted)
This adds to the disappointing survey data I looked at only yesterday and opens the door to a further decline in something which had previously seen some flickerings of hope.
The United States
If German manufacturing is an engine for Euro area growth then manufacturing in the United States has a similar role for the world economy. I pointed out last December that revisions had meant the past was no longer as good as it had been reported and now we see this.
Manufacturing output decreased 0.3 percent in March…..For the first quarter, manufacturing output moved up at an annual rate of 0.6 percent, roughly reversing its small decrease in the fourth quarter of last year.
So the sector is treading water overall maybe as we note on a monthly basis 2016 has gone 0.4%,-0.1% and now -0.3%. Oh and this year’s annual revision again told us that the past was not as good as we had been told.
The revised, smaller increases for manufacturing for 2014 and 2015 resulted from rates of change for many durable and nondurable goods industries that are lower than reported earlier.
Looking forwards the JP Morgan business survey was not optimistic.
April data indicated that U.S. manufacturers started the second quarter of 2016 with a renewed slowdown in production and new business growth…….Output volumes were close to stagnation in April, with the latest survey pointing to the weakest rise since the current period of expansion began in October 2009.
There is much to consider here and there is an element of the world changing. What I mean by this is the inexorable rise of the service sector which can be illustrated by the music industry. Last week the Financial Times reported this about Warner Music.
Warner Music Group has become the first major record company to report that streaming has become its largest source of revenue, surpassing sales of physical formats such as CDs and vinyl……..Overall digital revenue increased 20 per cent to $328m, offsetting declines in physical formats.
Thus a service replaces something which is physically produced. The online stream or cloud replaces the physical production and possession of an acetate ( reads better I think than LP…) or a CD or if we stretch our memories a cassette or cartridge. If I may divert for a moment this illustrates another theme where we rent rather than own things (which in itself is a reversion to say the 1970s intriguingly when we were poorer…) which is of consequence for those who have read the recent Apple I-Tunes stole my music blog. There are gains in not having to physically store things and use up scarce resources in production but also losses often in terms of the music’s quality ( I mean bits per second here) and matters like album sleeve art such as the prism on the cover of Dark Side of the Moon. Oh and has actual music quality fallen too and is that a coincidence?
But as well as that above there is a secular or tectonic plate shift to cheaper emerging economies. Also if we are to pursue the Holy Grail of annual economic growth combined with finite resources then until we can mine asteroids,comets and planets then manufacturing has to see a relative decline.
Perhaps also we need to double-check how we define manufacturing…..