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Global Manufacturing Downturn Makes Manufacturers Wary

Global Manufacturing Downturn Makes Manufacturers Wary

Several key barometers for the manufacturing sector point to a potential slowdown.

The most recent IHS Markit Flash U.S. Composite Purchasing Managers’ Index (PMI) release showed new work rose at the slowest pace since the index began, in October 2009, and backlogs of work fell for the third straight month. 

That lack of work is now beginning to impact other areas within the industry. According to the report, employment numbers fell at the steepest rate since December 2009, which survey respondents often attributed to more cautious hiring strategies due to the lack of new and backlog work.

"An increased rate of job culling adds to the gloomy picture with jobs being lost among surveyed companies at a rate not seen since 2009," says Chris Williamson, Chief Business Economist at IHS Markit

"The overall subdued picture reflects a spreading of economic weakness from manufacturing to services," Williamson added.

Global Manufacturing Continues to Slide

Global PMI surveys continue to show the slowdown of manufacturing businesses around the world. JPMorgan’s Global Manufacturing PMI, also compiled by IHS Markit, fell from 49.8 in May to 49.4 in June, its lowest figure since October 2012.

“Output, new orders, exports, inventories, backlogs of work and employment all fell during the month,” says Chris Williamson, chief business economist for IHS Markit. “Factory gate price inflation meanwhile slipped to the lowest for nearly three years, in part reflecting a further easing of raw material cost pressures.” 

Unstable or weakened international trade conditions contributed to the drop in new orders, which fell for the tenth successive month.

Depressed manufacturing conditions continue in Europe, UK, China, Japan and other Asian nations. The steepest downturns were seen in Europe—for example, the German manufacturing sector has contracted for eight consecutive months. Both China and Japan report fewer exports and Japan’s manufacturing sector has contracted for four consecutive months.

These survey results confirm the first significant global decline in manufacturing since October 2012, accompanied by manufacturing layoffs.

What Does 2020 Hold?

U.S. manufacturers are wary of what 2020 will bring. The IHS Markit indicates the metric of confidence in a strong economy among manufacturers is at its lowest since 2012. The data also shows that the current weakness in U.S. manufacturing impacts related sectors—for example, the IHS Markit gauge of business activity for U.S. service providers fell to 50.9 from 53 in July and matches the lowest since February 2016. “Weaker global demand is causing service firms to cut prices at the same time input costs weaken,” IHS Markit reports. 

Perhaps the biggest obstacle to stronger manufacturing is trade policy. Current tariff battles have significant negative impacts to global gross domestic product (GDP). Higher interest rates are also hurting manufacturing sectors. Other companies are holding back on spending, fearful of what might lie ahead. 

Analysts say these numbers and current conditions indicate an economic softening is likely on the horizon. As organizations evaluate their company's strength and positioning for the upcoming year, now is the time to take notice of the terms of their contracts.

Supply chain and customer disputes often make their way to the forefront during times of softening and experts warn these could be potential stumbling blocks as the industry navigates through 2020.

Jeffrey White, an attorney with Robinson and Cole LLP, recently advised manufacturers review their long-term contracts, which are, “often loaded with conditions that tend to not be enforced during good times.”

"When the economy tightens, it is common for customers and suppliers to start enforcing difficult terms and seeking to apply those terms retroactively," White added. "For that reason, even if you do not negotiate certain terms out of a contract, it is important to know they are there and how they might be used.” 

Reason for Optimism

Despite some of the dreary numbers and indications of a slowdown there is hope, and some evidence, that the manufacturing industry is moving away from a downturn. 

The October IHS Markit Flash U.S. Manufacturing PMI reached 51.5 in October, up from 51.1 during September, signaling the fastest rate of improvement in six months. This was the second consecutive month for increased confidence within the industry.

The increase was attributed to stronger growth of output, new orders and employment. 

“If manufacturing can continue to gain momentum this should hopefully feed through to stronger jobs growth and an improved service sector performance, leading to better GDP growth," says Williamson.

Some opinions expressed in this article may be those of a contributing author and not necessarily Gray.