As independent ERP consultants and advisors to mid-marketing manufacturing and distribution organizations, our team sees value in staying current with world economic affairs, with special focus on the U.S. Manufacturing and Distribution Industry.
Our monthly state of the economy update includes facts and figures captured in November 2017, as well as details about events that have major sway over the economy.
November: Will the Holiday Season give us a boost?
The pickup in global activity that started in 2016 gathered steam in the first half of 2017, reflecting firmer domestic demand growth in advanced economies and China and improved performance in other large emerging market economies. The continued recovery in global investment spurred stronger manufacturing activity.
World trade growth moderated in the second quarter after expanding very briskly in the first. Global purchasing manager indices and other high-frequency indicators for July and August suggest that global growth momentum continued into the third quarter of 2017.
Among advanced economies, domestic demand and output grew faster in the first half of 2017 than in the second half of 2016.
In the United States, weakness in consumption in the first quarter turned out to be temporary, while business investment continued to strengthen, partly reflecting a recovery in the energy sector.
Global Market Activities
In the Euro area and Japan, stronger private consumption, investment, and external demand bolstered overall growth momentum in the first half of the year. Growth in most of the other advanced economies, with the notable exception of the United Kingdom, picked up in the first half of 2017 from its pace in the second half of 2016, with both domestic and external demand contributing.
Europe continued to dominate the list of the top export markets with strong manufacturing growth. The IHS Markit Eurozone Manufacturing PMI increased to its highest level since February 2011, buoyed by the best readings in France, Germany, Italy and the Netherlands in more than six years. Moreover, real GDP in the Eurozone rose 0.6 percent in the third quarter. That translated into 2.5 percent growth year-over-year, the quickest pace since the first quarter of 2011.
New industrial production figures will be released on November 14, which it is hoped will build on August’s increase of 1.4 percent.
The Caixin China General Manufacturing PMI did not change in October at 51.0, but growth remained at its slowest pace since June. The underlying data provided mixed results.
The Chinese economy grew 6.8 percent year-over-year in the third quarter, edging down slightly from 6.9 percent in the first and second quarters. Reflecting stronger growth of late, industrial profits in the manufacturing sector jumped 19.6 percent year-over-year in September.
Mixed News in North America
The IHS Markit Canada Manufacturing PMI decreased from 55.0 in September to 54.3 in October. One year ago, the figure was 51.1, with the Canadian economy improving significantly since then, buoyed by stabilized energy markets. In October, manufacturers in Canada reported slower—but still modest—expansions in new orders and output.
The latest regional data matched the headline numbers, with softer growth reported for Alberta and British Columbia, Ontario, Quebec and the rest of Canada.
Impacts of Natural Disasters
The recent earthquake in Mexico sent activity into negative territory for the first time in more than four years. The IHS Markit Mexico Manufacturing PMI dropped from 52.8 in September to 49.2 in October. This decline—the first since July 2013—is likely temporary, and it would be expected for modest growth to resume in November.
Along those lines, manufacturers in Mexico remained very upbeat, even with some easing, about future output, which should bode well for strong gains in production over the next six months.
The Story in the U.S.
Recent reports are highlighting strength in the U.S. economy.
Along those lines, manufacturing production expanded robustly in October, up 1.3 percent, its fastest monthly pace of growth since April. In October, durable and nondurable goods production rose by 0.4 percent and 2.3 percent, respectively, with the latter rebounding from significant declines in activity in August and September in the chemicals and petroleum and coal products segments due to Hurricanes Harvey and Irma.
As a result, manufacturing production has risen by 2.5 percent over the past 12 months, the best year-over-year rate since August 2014. In a similar manner, manufacturing capacity utilized soared from 75.5 percent in September to 76.4 percent in October, a reading not seen since May 2008.
Consumer spending has been a bright spot in the economy, but there was more caution in the data in the summer months than we might have preferred. The good news is that Americans have opened their pocketbooks more since then. Indeed, retail spending edged higher in October, up 0.2 percent, building on September’s strong 1.7 percent gain.
On a year-over-year basis, retail sales have risen 4.6 percent since October 2016, off just slightly from 4.8 percent in the previous report, which was a six-month high. There has been robust growth in motor vehicle and parts sales in the past two months, up 4.6 percent and 0.7 percent in September and October, respectively, with the segment benefiting from hurricane-related replacements. Excluding automobiles, retail sales were up 0.1 percent in October, with year-over-year growth of 4.3 percent.
What About Technology & Investment?
Most companies across the globe will be keeping IT budgets steady, or giving them a boost over the next 12 months. In fact, close to half of companies (44%) expect budgets to increase while 43% anticipate no change at all. Only 11% expect to see their budgets decrease. Companies that expect budgetary gains foresee a 19% jump in IT budgets, on average.
Why such a positive outlook? An ever-increasing dependence on technology in the workplace could be one explanation for these sudden favorable winds. More IT departments will swell in size than shrink. The larger companies forecast the biggest boost in staffing. More than 60% of companies with 500+ employees expect to increase IT staff while 70% of large enterprises (5000+) report they’ll hire more IT pros in 2018.
Technology trends have been focusing on certain challenges to increase their growth. First of all, many companies are concentrating on deeper workflow automation. In order to drive deeper organizational adoption of digitalization and the resulting improved efficiency, many CIOs plan to shift new investment to building apps that automate workflows and coordinate resources around them. Investors should look to companies that plug into those goals.
Engaging in secular and cyclical security obstacles will be a differentiating factor for technology companies moving forward as well. Software companies that are positioned to consolidate various functions into broader security platforms to drive more effective and efficient spending on cybersecurity, as well as vendors who can secure new threat vectors, such as cloud and mobile, to perform better than the overall group.
Finally, there is a refocus effort on small and midsized businesses, which are still a well under-penetrated market opportunity for software. Software providers that can help customers in this niche market solve their business challenges with easy-to-use, but effective solutions—and efficient distribution models—could sustain outsized growth in the software sector.
Ultra’s Take – Stability Ahead?
International markets continue to show resilient stability in the face of political uncertainty surrounding trade policies. The Eurozone also continues to display the strongest growth and China continues to demonstrate its economic strength, month over month and seems to be getting even more stable in its growth albeit experiencing slower growth.
U.S. regional indexes were positive this past month with some regions experiencing boosts after natural disasters and with the promise of holiday shopping to come.
Perhaps most notably, U.S. exports improved this month, narrowing the deficit. However, the U.S. still has a long way to go in this regard.
Moreover, according to select Fidelity portfolio’s, year to date returns in numerous industries have been overwhelmingly positive, which shows that most large companies are still stable and growing despite any uncertainty. On the other hand, trade policy is in flux with fifth round of NAFTA negotiations underway, putting consistent strain on the U.S. relationship with its bordering countries.
The U.S. has also been conducting consistent commerce talks with countries like Korea and India but so far nothing tangible has come of these discussions. With major holiday shopping numbers still to come, we can most likely bet on an uptick since one thing that never fails to boost the economy is some good holiday capitalism.