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Global production sputters | CNN affairs

 Global production sputters |  CNN affairs

Washington, DC

Manufacturers around the world are facing declining demand as the economic outlook for the industry worsens.

Factories in the United States and across the Eurozone reported a drop in new orders for manufactured goods in May as they cleared backlogs, according to recent business surveys from data firm S&P Global. It’s unclear how long those backlogs, which widened in the early days of the pandemic, will sustain the industry globally.

Data from S&P Global showed that the US manufacturing sector fell into contraction territory in May. A similar study by the Institute for Supply Management found that the sector contracted for a seventh straight month in May, faster than the previous month.

US government data also shows what could be the start of a continued growth slowdown. The Commerce Department reported Monday that factory orders excluding transportation, a volatile category, fell for a third straight month in April. Excluding defense, factory orders fell in four of the past six months through April.

Eurozone production, new orders and backlogs from manufacturers all fell in May, according to S&P Global data, as the sector contracted more rapidly that month. Industrial production in the 20-nation currency zone fell sharply in March, mainly due to a nosedive in Ireland. The indicator measures the output of manufacturers, miners and utilities.

The situation is not much better in China.

Business conditions in China’s manufacturing industry, the largest in the world, improved in May, according to the Caixin Manufacturing Purchasing Managers’ Index. That was a temporary sigh of relief for investors who feared growth in the world’s second-largest economy is stagnating, but recent data showed exports from China fell 7.5% year-on-year in May, the biggest drop since January, while imports contracted further that month.

China’s shaky trade data reflects weak demand for Chinese goods, on top of other economic problems the country faces, such as rising unemployment and a deep slump in the real estate sector.

Global manufacturing optimism fell to its lowest level since December, according to the JPMorgan Global Manufacturing PMI.

“While manufacturing activity appears to have improved somewhat in May, it was mainly due to stronger growth in some major emerging markets,” Ariane Curtis, global economist at Capital Economics, wrote in an analyst note. “The outlook for the sector remains bleak, especially new export orders are falling sharply.”

Consumers around the world were forced to reduce their spending on services in 2020 due to the pandemic, resulting in an explosion in goods purchases. As a result, the order backlog of manufacturers grew rapidly.

Consumers have since shifted their spending back to services since countries around the world lifted pandemic-era restrictions. Hospitality companies in both the United States and Europe are gearing up for a record-breaking summer of travel. That continued shift to spending on services, coupled with tighter financial conditions as central banks raise interest rates, spells trouble for commodity producers, economists say.

According to an International Monetary Fund forecast, China’s recent reopening after years of draconian pandemic restrictions would give the global economy a “new impetus”. But the country’s recovery has been disappointing. The possibility of China reviving global economic growth is diminishing.

“We’ve now seen a lack of demand for goods around the world because of this acceleration in the goods-to-services pivot, which is why you’re starting to see the services sector (purchasing manager indices) picking up,” said Tom Garretson, senior portfolio strategist at RBC Wealth Management US. “And there was a lot of anticipation for China’s reopening, but clearly that hasn’t materialized across the board.”

Central banks continue their war on inflation. Rising interest rates curb inflation by cooling demand, ultimately prompting banks to tighten their lending standards. This was the case in the United States, especially after the bankruptcy of three regional banks in recent months. Credit conditions have also tightened in the eurozone, especially following the forced merger of Swiss banks Credit Suisse and UBS.

The Federal Reserve, America’s powerful central bank, has raised interest rates ten times in a row to a level that is “sufficiently restrictive,” according to Fed Chairman Jerome Powell. The European Central Bank has also been aggressively raising interest rates to fight inflation in the Eurozone and has not yet signaled a willingness to stop.

Durable goods, defined as products that last at least three years, such as cars and appliances, are often purchased on credit, so tighter credit terms will inevitably weigh on manufacturers. That could ultimately lead to global manufacturers cutting back on workforces as demand for goods continues to weaken and their backlogs narrow further.

A recession is defined as a broad economic downturn that includes weak consumption. Purchases of discretionary goods are among the first things consumers skimp on when they cut back, so broader signs of economic weakness don’t bode well for manufacturers.

Economists at the Fed confirmed their forecast of a mild recession in the US later this year, although the country’s labor market remained stable. Revised data from this week showed that the 20-nation Eurozone entered a recession at the turn of the year. The bloc’s gross domestic product fell 0.1% in the first quarter from the previous three months, after falling 0.1% in the fourth quarter. Although the economic output of the wider European Union increased by 0.1% in the first three months of the year.

Germany, Europe’s largest economy, experienced a steeper decline in economic output than the eurozone at the turn of the year, also pushing into a recession. The German economy shrank by 0.3% in the first quarter from the previous quarter, following a contraction of 0.5% in the fourth quarter.

Rising interest rates and high inflation weighed on consumers and businesses in both regions, although price increases have moderated in recent months.

Meanwhile, China’s economy grew 2.2% in the first quarter over the previous three months, mainly due to the country’s reopening as Chinese consumers returned to eating out and traveling. Compared to the same period a year ago, China’s GDP grew by a whopping 4.5% in the first three months of the year. All eyes will be on May’s data measuring China’s economic performance.

Foxconn, a multinational electronics manufacturer and a major supplier to Apple, expects revenue from its cloud and networking products to remain flat in 2023, with an expected decline in the second quarter. The company’s chairman, Liu Young-way, said in an earnings call last month that the company has a “conservative outlook” for the coming months.

Monish Patolawala, executive vice president and chief financial and transformation officer at the manufacturing giant 3M, said in an earnings call last month that the company’s electronics business was “heavily impacted by a significant drop in demand for consumer electronics.” 3M announced plans to lay off 6,000 employees worldwide in April.

A National Association of Manufacturers survey released this week found that 67% of U.S. manufacturers surveyed were optimistic about the future of their businesses, the smallest share since the third quarter of 2020. Retaining quality employees, a weak domestic economy and an unfavorable business environment were the biggest challenges faced by manufacturers.

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