The state of the economy can often dictate how much growth certain industries are experiencing. This in turn influences their business decisions and modernization requirements. Consequently, Ultra’s team of ERP consultants takes a huge interest in world economic affairs, with special focus on the U.S. Manufacturing and Distribution Industry.
The June 2017 state of the economy update includes facts and figures captured in May, as well as details about events that have major sway over the economy. We put the focus on how this information impacts those considering manufacturing ERP initiatives.
A Summer Heat Stroke for the World Economy?
According to a new report from the World Bank, the global economy is strengthening. It sees world GDP growing 2.7 percent and 2.9 percent in 2017 and 2018, respectively, up from 2.4 percent in 2016. In the United States, the World Bank predicts 2.1 percent and 2.2 percent growth in 2017 and 2018, respectively, up from 1.6 percent in 2016. In the emerging and developing economies, it predicts growth increasing from 3.5 percent to 4.1 percent to 4.5 percent from 2016 to 2018.
Moreover, the outlook in June has changed little from the January report. The underlying message is that the international economy appears to have turned a corner—especially when compared to the headwinds over the past few years—and is headed in the right direction. The World Bank also notes that political uncertainty, particularly regarding trade, could pose downward risks to these projections. This assessment is not news, many world powers have had important elections in the past few months, and the results of these elections of created space for
Manufacturing Activity
The strongest manufacturing growth among our top trading partners in April included Germany, the Netherlands, the United Kingdom, the United Arab Emirates, Canada, and France. Many of the best PMI readings globally occurred in Europe, showing just how much the continent’s economies have turned a corner.
Helping to buoy the headline number, Austria and Germany (up from were at or near six-year highs. Hiring in Spain grew at its quickest clip since July 1998. Markit Eurozone Manufacturing PMI rose to its best reading since April 2011 with stronger growth across the board. Real GDP in the Eurozone accelerated to 0.6 percent growth in the first quarter, its fastest pace in two years.
The Caixin China General Manufacturing PMI declined from 50.3 in April to 49.6 in May, indicating falling conditions for the month and a turnaround from recent progress. Indeed, all of the key indicators moved lower in May, including new orders, output and exports. It is important to note that all three of those measures saw marginal gains in activity for the month, even with the easing.
Mixed News in North America
The IHS Markit Canada Manufacturing PMI remained strong in May despite pulling back from a six-year high in April. Real GDP grew 0.9 percent in the first quarter, which translated into 3.7 percent growth at the annual rate in the first quarter, with consumer spending as well as business spending boosting the Canadian economy. In addition, manufacturing sales in Canada increased 1.0 percent in March.
The IHS Markit Mexico Manufacturing PMI rose from 50.7 in April to 51.2 in May. That represents marginal progress, but with a six-month average of 50.8, it is also clear that manufacturing activity in Mexico continues to expand quite slowly. On the positive side, activity was higher across the board in the latest survey, including new orders , output , exports and employment. May also held much in the way of possible trade policy changes. On May 18, U.S. Trade Representative (USTR) Robert Lighthizer sent a letter notifying Congress of the administration’s intention to renegotiate NAFTA.
Additionally, on May 11, the Commerce Department announced interim results of negotiations toward the 100-day plan, a goal announced after the high-level summit at Mar-a-Lago between President Donald Trump and Chinese President Xi Jinping..
A Focus on the U.S.
With regards to the U.S., as expected, the Federal Open Market Committee (FOMC) voted to raise short-term interest rates at the conclusion of its June 13–14 meeting for only the third time since the financial crisis. In making this decision, participants noted recent strengthening in the overall macroeconomy, including better data for consumer spending, business investment and hiring. While we had seen accelerations in both consumer and producer prices over much of the past few months, costs appear to have started to slow more recently. The consumer price index increased 1.9 percent year-over-year in May, its first reading below 2 percent since November, and producer prices for final demand goods and services have increased 2.4 percent since May 2016 Consumer confidence was also weaker.
The Index of Consumer Sentiment declined in June to its lowest point since November, according to preliminary data. Political uncertainties played into this waning in assessments, with continuing wide disparities in opinions based on partisan affiliation. Along those lines, retail sales fell 0.3 percent in May, signaling a more cautious consumer than we would expect or prefer.
Key Indicators
The Federal Reserve reported that manufacturing production fell for the second time in the past three months, down 0.4 percent in May. After rebounding strongly in April, up 1.1 percent, this latest figure is a bit of a disappointment, suggesting a softening of activity following recent progress. Motor vehicles and parts production led the decline in May, down 2.0 percent for the month and off 1.5 percent year to date, as automotive demand has continued to be weaker than desired so far in 2017.
Despite the easing in this latest release and some lingering challenges, the underlying data remain consistent with a manufacturing sector that has turned a corner and has moved in the right direction, especially relative to where it stood at this point last year.
Digging into the underlying data, non-durable goods production edged up 0.1 percent in May, but durable goods output fell 0.8 percent. In contrast, higher production levels included chemicals, apparel and leather, and machinery.
Ultra’s take:
The biggest danger for U.S. manufacturing firms is how upcoming trade policy changes will affect their exports.
International markets remain in a state of uncertainty due to expected policy alterations from the U.S., especially regarding NAFTA. However, the Eurozone continues to emit stability despite the current political climate in the U.K. and terrorism concerns, and China continues to demonstrate its economic strength, month over month. Markets have not changed dramatically from last month’s update;, U.S. regional indexes mostly declined again this past month with companies experiencing much slower rates of growth. The U.S. still specializes in traditional industries with other countries outstripping us in new technologies and markets.
Our top trading partners are experiencing multi – year highs in their production industries, and their exports consistently surpass our own. However, Philadelphia’s special questions section shows that manufacturers expect significant acceleration in production through the second and third quarters.
Firms plan on accomplishing this growth principally through hiring contract workers as employees and increasing productivity of current employees, which could mean adding technology improvements to the workplace. However, the new administration has declared that NAFTA is to be renegotiated which puts the U.S.’s relationships with Canada and Mexico at risk, as well as issuing other executive trade orders in past month putting trade under higher scrutiny.
The U.S. is also planning talks with China to attempt to balance the trade relationship between the two world powers.
Overall, world growth is relatively stable but the biggest danger for U.S. manufacturing firms is how upcoming trade policy changes will affect their exports, and until decisions are made, it seems growth will be tentative at best.
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See Ultra’s previous analysis on economic activity for more information.
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