The state of the economy can often dictate how much growth certain industries are experiencing which can influence their business decisions and modernization requirements.
Consequently, Ultra Consultants takes a huge interest in world economic affairs, with special focus on the U.S. Manufacturing and Distribution Industry. September’s state of the economy update includes facts and figures captured in August, as well as details about events that have major sway over the economy.
September: FALLing Upwards
Projected global growth rates for 2017–18, though higher than the 3.2 percent estimated for 2016, are below pre-crisis averages, especially for most advanced economies and for commodity-exporting emerging and developing economies. Among the former, many face excess capacity as well as headwinds to potential growth from aging populations, weak investment, and slowly advancing productivity. In view of weak core inflation and muted wage pressures, policy settings should remain consistent with lifting inflation expectations in line with targets, closing output gaps, and—where appropriate—external rebalancing.
Reforms to boost potential output are crucial, and slow aggregate output growth makes it even more important that gains are shared widely across the income distribution. Financial stability risks need close monitoring in many emerging economies. Commodity exporters should continue adjusting to lower revenues, while diversifying their sources of growth over time.
Global Activity – Growth Returns
Globally, growth outturns in the first quarter of 2017 were higher than the April WEO forecasts in large emerging and developing economies such as Brazil, China, and Mexico, and in several advanced economies including Canada, France, Germany, Italy, and Spain. High-frequency indicators for the second quarter provide signs of continued strengthening of global activity.
Specifically, growth in global trade and industrial production remained well above 2015–16 rates despite retreating from the very strong pace registered in late 2016 and early 2017. Purchasing managers’ indices (PMIs) also signal sustained strength ahead in manufacturing and services.
None of the top-15 markets for U.S.-manufactured goods contracted—a major accomplishment and a sign of the tremendous progress in the international economy over the past year. Some showed slippage in that gauge, with the two most challenged economies slowing once again. South Korea returned to negative terrain (down from 50.1 to 49.1), contracting for the 11th time in the past 12 months on sharp reductions in output and exports.
At the same time, Brazil fell back to neutral territory (down from 50.5 to 50.0), ending three straight monthly expansions but with still growing—but slower—new orders and production. On the positive side, 12 of the top-15 markets for U.S.-manufactured goods expanded, and the overall trend lines globally for the sector remain encouraging. (There is no manufacturing PMI for comparison purposes for Belgium, which is our 10th-largest trading partner.)
Meanwhile, Europe continued to dominate the list of the top export markets with strong manufacturing growth. Those countries with the highest PMI readings in the sector in July included the Netherlands (up from 58.6 to 58.9), Germany (down from 59.6 to 58.1), the United Arab Emirates (up from 55.8 to 56.0), Canada (up from 54.7 to 55.5), the United Kingdom (up from 54.2 to 55.1) and France (up from 54.8 to 54.9). Manufacturing activity in the Netherlands once again grew at its quickest pace in more than six years.
Mixed News in North America
In Canada, real GDP grew 0.9 percent in the first quarter, picking up from the 0.7 percent gain in the fourth quarter. That translated into 3.7 percent growth at the annual rate in the first quarter, with both consumer and business spending boosting the Canadian economy. In addition, manufacturing sales jumped 1.1 percent, expanding for the third straight month on strength in motor vehicles and chemicals, among other sectors. Most impressively, sales in the sector have jumped 8.7 percent year-over-year. Similarly, retail spending also saw healthy gains, up 0.6 percent, with year-over-year growth of 7.3 percent.
In Mexico, real GDP increased 2.8 percent year-over-year in the first quarter, its best reading since the third quarter of 2015. Mexican industrial production rebounded, up 1.0 percent after falling 4.2 percent in April. Output in the manufacturing sector rose 5.0 percent in May. Meanwhile, the unemployment rate decreased from 3.6 percent to 3.3 percent.
The Story in the U.S.
In the U.S., Economic growth is projected to pick up in 2017 and 2018 as headwinds from past exchange rate appreciations abate and support from fiscal policy begins to appear. Consumer spending will benefit from continued, though slowing, employment gains and, as the labor market tightens, stronger wage growth. With inflation nearing its target and unemployment edging down further, monetary policy stimulus has begun to be withdrawn gradually.
As growth picks up, further interest rate rises are projected to contain inflationary pressures and reduce the risk of financial-market distortions. Reducing the size of the central bank’s balance sheet may soon become appropriate. The Administration and Congress are formulating plans to cut taxes and boost infrastructure spending. The present projection assumes no spending increase at the federal level, but a tax reform is projected, which will support consumer spending and investment in 2018.
Hurricanes, Production Levels Bring Volatility
The U.S. is already starting to see the impacts from Hurricanes Harvey and Irma in the economic data. For the manufacturing sector, production fell 0.3 percent in August, and the Federal Reserve estimates reduced output by 0.75 percent in August.
Beyond weather, there is a lot of volatility in manufacturing production since the spring—essentially seesawing from month to month since March. Yet, even with that weakness, the longer-term trend for output among manufacturers has been encouraging. All three subcomponents of industrial production were lower for the month. In addition to manufacturing, mining (down 0.8 percent) and utilities activity (down 5.5 percent) were also sharply reduced. Industrial production has increased by 1.5 percent year-over-year.
Ultra Consultant’s Take
International markets have shown a resilient stability in the face of political uncertainty surrounding trade policies. The Eurozone continues to emit consistent growth and China continues to demonstrate its economic strength, month-over-month and seems to be getting even more stable in its growth. Markets have not changed dramatically from last month’s update; U.S. regional indexes were mixed this past month with some regions experiencing expected declines due to weather concerns.
The Dallas manufacturing region fared the worst, most likely due to the devastating hurricanes in the region. However, the Northeast exhibited some strong numbers and seems to be on a consistent rise after many months of extremely low growth. Unfortunately, U.S. exports lagged far behind their counterparts again this month.
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. Furthermore, although NAFTA negotiations are still set to occur, it seems that at this point in time, there will not be any drastic changes which has improved the outlook numbers in the manufacturing survey this month. The U.S. is still planning numerous talks across the globe to discuss the trade balance between continents. Despite some hardships for the U.S. economy this past month, on the whole, markets seem stable and growing.