The team at Ultra Consultants stays connected to world economic affairs, putting a special focus on the U.S. Manufacturing and Distribution Industry.
We summarize recent economic activities with metrics captured in January, as well as details about events that have major sway over the economy.
Global financial markets have been highly volatile over the past week, starting with U.S. equities following last Friday’s strong job numbers. In addition, as expected, the Federal Open Market Committee (FOMC) chose not to increase short-term rates at its January meeting, but it did suggest that “measures of inflation compensation have increased in recent months but remain low.” The FOMC is expected to hike the federal funds rate at its March 20–21 meeting.
Strong economic growth, including job gains and wage pressures, combined to send a signal to financial markets that the Federal Reserve might be more hawkish on rates than some might have predicted, and that was enough to send equity markets sharply lower.
For instance, the Dow Jones Industrial Average is down 4.8 percent so far in February, although, to be fair, it remains 36.3 percent higher than it was on Election Day in 2016. One could easily make the case that a correction was overdue. Fortunately, the financial market has—at least for now—shown signs of stabilizing after the freefall earlier in the week, but analysts suggest that we might be in for more volatility.
A Focus on the Fundamentals
Despite the stock market fluctuations of the past week, the fundamentals of the worldwide economy remain quite healthy, and more importantly, the outlook continues to be strong. T
he J.P. Morgan Global Manufacturing PMI pulled back slightly from December’s pace, which was the fastest since February 2011, but the good news is that exports strengthened in the latest figures to the best reading in nearly seven years—a sign that trade volumes have picked up as the international economy has continued to improve.
Output and employment remained at the best rates since early 2011, with new orders slipping a little from a seven-year high but continuing to expand at a decent clip. Looking ahead six months, manufacturing leaders remained very upbeat in their global outlook, with that measure at an 11-month high.
The Chinese economy grew 6.8 percent year-over-year in the fourth quarter, the same rate as in the third quarter.
For the year, Chinese real GDP rose 6.9 percent, which was better than expected. Industrial production ticked higher in the latest data, up from 6.1 percent year-over-year to 6.2 percent. At the same time, fixed asset investment, which was unchanged at 7.2 percent year-over-year, has decelerated since its recent peak of 9.2 percent year-over-year in March. Meanwhile, retail sales weakened noticeably in the latest data, down from 10.2 percent year-over-year in November to 9.4 percent in December.
Furthermore, Xi Jinping has made a move to eradicate term limits on Chinese presidents which would mean that he will be an indefinite ruler moving forward. The implications of this are still divided, with some saying a consistent leader would lend the Chinese economy to stability, and others arguing that concentrating power for too long would lead to a fractured system.
The IHS Markit Eurozone Manufacturing PMI declined from 60.6 in December—its best reading since the survey began in June 1997—to 59.6 in January.
Most of the underlying indices edged down in January but remained strong overall. Activity jumped to all time high’s in the Netherlands, Greece, and Italy.
The IHS Markit Emerging Markets Manufacturing Index decreased from 52.2 in December to 51.8 in January. Despite some slippage, the data mostly continue to show improvements in emerging market economies, which is encouraging.
Manufacturing Further On
The IHS Markit Canada Manufacturing PMI increased from 54.7 in December to 55.9 in January, continuing a trend of improvements in the Canadian economy that began last year as the energy market stabilized. Real GDP growth eased from 1.0 percent in the second quarter to 0.4 percent in the third quarter, largely on weaker export data. That translated into 1.7 percent growth at the annual rate, down from 4.3 percent in the second quarter.
Moreover, manufacturing sales decreased 0.4 percent in October, mostly on reduced chemical, machinery and motor vehicles and parts orders. Still, manufactured goods sales have risen 4.3 percent year-over-year.
The IHS Markit Mexico Manufacturing PMI increased from 51.7 in December to 52.6 in January, the best reading since September. Overall, Mexico continued to underperform. Along those lines, real GDP decelerated from 1.9 percent year-over-year in the second quarter to 1.5 percent in the third quarter, the slowest growth rate since the fourth quarter of 2013. Industrial production declined 1.5 percent year-over-year in November, falling for the sixth consecutive month. Manufacturing has fared better, up 2.4 percent over the past 12 months, but it has decelerated since notching a 5.0 percent year-over-year pace in May. Meanwhile, the unemployment rate decreased to 3.1 percent in December, the lowest rate since December 2007.
U.S. Activities a Mixed Bag
In the U.S., U.S.-manufactured goods exports rebounded strongly in 2017—a nice turnaround after global economic weaknesses in both 2015 and 2016. Using non-seasonally adjusted data, U.S.-manufactured goods exports totaled $1,094.73 billion in 2017, up 4.34 percent from $1,049.24 billion in 2016.
This reflects better year-to-date figures to the top-six markets for U.S.-manufactured goods. The U.S. dollar has fallen 2.6 percent so far in 2018 against major currencies, according to the Federal Reserve, or 11.0 percent since the end of 2016, helping to improve international demand for U.S.-manufactured goods. Despite, the positive news for manufacturers, the U.S. trade deficit rose in December to the highest level since October 2008. However, goods exports, petroleum exports, service-sector exports and goods imports rose to all-time highs, highlighting the increase in global trade of late.
Technology & Investment
The 2018 forecast shows that enterprise software will continue to exhibit strong growth, with worldwide software spending increasing by 9.5% in 2018 and by 8.4% in 2019 to reach a total of $421bn. Overall, reports from Gartner forecasts a 4.5% increase in IT spending in 2018 compared with 2017, to reach $3.7tn. The forecast also shows a slight increase of 0.6% in data center spending in 2018 compared with 2017 but predicted a decline of 0.2% in 2019. Other reports indicate that 60% of medium sized companies and 70% of large companies say their IT budgets will increase in 2018.
The lion’s share of the budget bounty will be spent on hardware (31%), with software (26%), hosted/cloud-based services (21%), and managed services (15%) rounding out the tech haul this coming year. In the hardware space, desktops (17%), laptops (15%), servers (13%), and networking (8%) fill up the biggest portion of IT budgets.
Projected growth for PC’s is flat in 2018 and there is a marginal increase predicted in spending on mobile devices due to average selling price rises for these devices. It was also noted that the impact of the iPhone 8 and iPhone X was minimal in 2017, as expected. However, it expected iOS shipments to grow by 9.1% in 2018.
Investments in SaaS
- The availability of new SaaS products is encouraging new adoption and spending across many subcategories, such as financial management systems, human capital management and analytic applications.
- For leading companies, spending patterns are likely to shift towards projects in digital business, blockchain, the internet of things and progression from big data to algorithms to machine learning and artificial intelligence (AI).
Ultra’s Take: Legislative Impacts
International markets were volatile this month, but most continue to show steady progress.
U.S. trade policy has multiple items up on the docket that could cause changes. The Trump administration has taken action on two Section 201 safeguard cases, choosing to impose tariffs on imports of solar cells and modules and of finished washing machines that the U.S. International Trade Commission had found had increased in such quantities to be a substantial cause of significant harm to the domestic solar cell and washing machine industries. South Korea and China filed challenges at the World Trade Organization (WTO) to both cases, Taiwan joined the case against solar cells, and other WTO challenges are expected.
Additionally, the administration’s Section 301 investigation into Chinese intellectual property and technology transfer issues is ongoing. The U.S. continues to shake up it’s foreign affairs by preparing for a seventh round of NAFTA negotiations to take place in Mexico, and a second round of talks with Korea on the Korea-U.S. Trade Agreement. While it remains to be seen how these developments will affect the U.S. economy, we would do well to increase diplomacy and keep a close eye on rising power systems elsewhere in the world.
Positive, Yet Demure
It seems we are off to a positive, yet demure start to 2018.
Leading economies are exhibiting slower, but stable growth and the U.S. has followed a similar trend with many manufacturing companies excited for growth due to new tax laws. According to the IMF, growth remains on the horizon, but it may be harder to achieve than originally expected