Slowing Trade Hits Global Manufacturing

By guest authors Inez Simon, Paul Hannon and Amara Omeokwe from Wall Street Journal

The global manufacturing slowdown worsened in September, and trade flows are set to grow this year at the weakest pace since the financial crisis as tariffs rise and the global economy cools.

Key Facts

  • US factory activity contracted for the second straight month, the Institute for Supply Management said.
  • Its US manufacturing index fell to 47.8 in September from 49.1 in August.
  • Surveys of purchasing managers in Europe and Asia pointed to deepening declines in The WTO warned that slowing trade could hit investment and jobs.
  • It now expects flows of goods across borders to grow by just 1.2% this year, down from 3% in 2018.

“Businesses remain downbeat about the year ahead, with optimism around a seven-year low amid trade war worries, signs of slowing global economic growth and geopolitical concerns, including heightened anxiety over a disruptive Brexit, said Chris Williamson, Chief Business Economist at IHS Markit.

Why This Matters

The ISM reading is the lowest since June 2009 and represents a continuation of the slowdown seen in August, when the index contracted for the first time since August 2016. Slowing economic growth has prompted a wave of central bank stimulus measures around the world. President Trump, however, blamed the Fed for the worsening US factory numbers, saying its interest-rate policies are responsible for the recent appreciation of the US dollar.

The WTO expects trade growth to rebound to 2.7% in 2020, but said that would depend on “a return to more normal trade relations.” It also warned that fresh tariffs “could produce a destructive cycle of recrimination.” The global trade system has been disrupted by the dispute between the US and China that has resulted in a steady increase in tariffs since early 2018.

The global manufacturing slowdown worsened in September, and trade flows are set to grow this year at the weakest pace since the financial crisis as tariffs rise and the global economy cools.

U.S. factory activity contracted for the second straight month, the Institute for Supply Management said Tuesday. Its U.S. manufacturing index fell to 47.8 in September from 49.1 in August.

The reading is the lowest since June 2009 and represents a continuation of the slowdown seen in August, when the index contracted for the first time since August 2016.

Surveys of purchasing managers in Europe and Asia released Tuesday pointed to deepening declines in factory activity in September, as a slowdown in exports hit factories.

Slowing economic growth has prompted a wave of central bank stimulus measures around the world, including from the Federal Reserve and the European Central Bank. The latest effort came Tuesday, when the Reserve Bank of Australia cut its key interest rate for the third time this year.

President Trump, however, blamed the Fed for the worsening U.S. factory numbers, saying its interest-rate policies are responsible for the recent appreciation of the U.S. dollar. He has urged the central bank to cut U.S. rates more aggressively than it has.

Mr. Trump tweeted Tuesday (October 1, 2019) that the Fed and its chairman, Jerome Powell, have “allowed the Dollar to get so strong, especially relative to ALL other currencies, that our manufacturers are being negatively affected. Fed Rate too high. They are their own worst enemies, they don’t have a clue. Pathetic!”

Many economists attribute the dollar’s strength to the U.S. economy’s solid, if cooling, performance relative to other major economies, and the manufacturing sector’s woes to the escalating trade disputes.

The World Trade Organization, in new forecasts on trade flows, warned that slowing trade could hit investment and jobs. “Job creation may be hampered as firms employ fewer workers to produce goods and services for export,” said Roberto Azevêdo, the WTO’s director-general.

The Geneva-based body said it now expects flows of goods across borders to grow by just 1.2% this year, down from 3 % in 2018. If the WTO is correct, it would be the lowest annual increase since 2009.

The WTO expects trade growth to rebound to 2.7% in 2020, but said that would depend on “a return to more normal trade relations.” It also warned that fresh tariffs “could produce a destructive cycle of recrimination.”

The global trade system has been disrupted by the dispute between the U.S. and China that has resulted in a steady increase in tariffs since early 2018. The U.S. has raised tariffs on a limited range of imports from some other countries, meeting with retaliation. Japan and South Korea are also at odds over trade.

The tariffs imposed by the U.S. and China have reduced trade between the world’s two largest economies. According to economists at Barclays, U.S. imports from China were 12 % lower in the first seven months of this year than in the same period of 2018, while Chinese imports from the U.S. were down 28 %.

Those declines haven’t been fully made up by increasing imports from other countries. U.S. imports were up just 3.6 % in the first seven months of the year, a sharp slowdown from the 9.1 % increase recorded in 2018, according to Barclays. In China, imports were down 2.3 %, having grown by 17.2 % in 2018.

According to the CPB Netherlands Bureau for Economic Policy Analysis, global trade flows rose in July, having fallen by 0.8 % in the second quarter and 0.3 % in the first three months of the year.

While U.S. manufacturing was down, ISM’s new orders index—one of the measures that contributes to the overall manufacturing index—registered at 47.3 for September, a slight increase from 47.2 in August. Newly placed orders for manufactured goods are seen as a proxy for business investment and consumer demand.

On October 1, 2019, a separate measure of U.S. manufacturing activity from data firm IHS Markit showed factory output increased in September, though the reading also showed the third quarter was the worst quarterly performance for the sector since 2009.

Surveys of purchasing managers in Asia and Europe pointed Tuesday, October 1, 2019, to a continued decline in factory output that was partly related to falling export orders.

Compiled by IHS Markit, the surveys pointed to declines in activity in South Korea, Japan and Indonesia. A separate survey by the Bank of Japan showed sentiment among the country’s large manufacturers deteriorated to the weakest level in more than six years.

In the U.K., which faces the additional challenge of an uncertain departure from the European Union, factory activity fell for the fifth straight month, the longest stretch since the financial crisis.

Across the Eurozone, activity was at its weakest since October 2012.

“There’s likely worse to come,” said Chris Williamson, chief business economist at IHS Markit. “Businesses remain downbeat about the year ahead, with optimism around a seven-year low amid trade war worries, signs of slowing global economic growth and geopolitical concerns, including heightened anxiety over a disruptive Brexit.”

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