The US just became the 5th major economy to see manufacturing slump — a sign of how hard Trump's trade war is hitting global growth
- Global manufacturing has taken a heavy hit during the trade war, with Germany, Britain, Japan, and South Korea all posting declines within the last month.
- The US economy's latest manufacturing PMI on Tuesday showed a surprise slowdown.
- The PMI reading shows how manufacturing heads feel that the industry is progressing, and therefore any declines are often a good tell for how the global economy is faring.
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The United States was the latest large economy to show a shock slump in manufacturing. The world's largest economy just joined the UK, Germany, Japan, and South Korea in posting similar manufacturing declines amid a worrying slowdown in global growth.
The latest US data came two days after Trump's newest round of tariffs kicked in, affecting billions of dollars' worth of Chinese and US consumer goods. The tariffs show the trade war is showing no sign of abating. Red flags warning of a potential recession have also been popping up in the market.
Manufacturing PMI is a key yardstick measuring how managers within the sector are feeling about the future of the economy and to judge how the industry is performing.
The results are consistent with the idea that the global economy is slowing, and that political uncertainty is taking a hit on these economies.
US factory activity unexpectedly slumped last month for the first time in three years, falling to 49.1 in August, the Institute for Supply Management said on Tuesday. The reading came in weaker than every single economist surveyed by Bloomberg expected.
"Deteriorating demand conditions, especially across the automotive sector, were linked to subdued client demand," Chris Williamson, Chief Business Economist at IHS Markit, said in a report. "External demand also weighed on new business growth. Although firms were largely optimistic, many stated that uncertainty and fears of a global economic downturn weighed on confidence."
Williamson blamed "rising trade war tensions and tariffs."
Chinese customs data showed that exports to China had dropped by 19% in July, as the higher tariffs put barriers on a key market for some American businesses.
Germany's latest PMI data from Monday showed that the sector "remained firmly in contraction," as the figure, 43.5, kept output expectations at a seven-year low - the lowest since the financial crash.
For the German economy, this is bad news, as 47% of GDP is made up by the manufacturing sector.
Much of the blame on this comes down to Brexit and the trade war. Trading Economics said exports slid 8% year on year in June, with non-eurozone sales falling over 6%.
German exports to the UK have fallen by 21%, the Financial Times said, with the bulk made up by a fall in demand for German autos from the UK.
The auto industry's decline will only worsen if Trump inflicts tariffs on the EU auto sector later this year.
Germany exports a lot of machinery to both China and the US. With the trade war putting up barriers to trade, orders have plummeted. In doing so orders for Germany machinery have dropped with it.
Japan's PMI made for poor reading as Jibun Bank Japan highlighted that "sluggish demand continued as conditions in domestic and overseas markets remained challenging."
August's figure of 49.3 reflected the fact that softer growth in Asia, in particular, China was to blame. China is Japan's top export market after the US, making up nearly 40% of exports between the two superpowers.
Japan, like Germany, suffers from weaker demand for Chinese and American products, as Japan exports machinery into both countries.
According to the Wall Street Journal, "capital spending by the country's manufacturers fell 6.9% in the April-June quarter," which was the first decline for two years as exports to China fell by 9.3% year on year in July.
High-tech exports have been especially affected by the trade war such as auto parts, the Journal said.
The United Kingdom
The UK also posted gloomy manufacturing data this week, as its PMI was the lowest reading in seven years - a signal of how hard Brexit is hitting the UK economy over uncertainty.
IHS Markit said that orders for British goods fell at its fastest rates for seven years, triggering a further fall in the pound.
Neil Wilson, an analyst at Markets.com, told Markets Insider on Monday: "Confidence is on the floor, with manufacturers as pessimistic as they have ever been," as business optimism slumped to its lowest level since the question was added to the survey in July 2012.
IHS Markit said that export businesses suffered the sharpest fall in seven years.
"The global economic slowdown was the main factor weighing on new work received from Europe, the USA, and Asia. There was also a further impact from some EU-based clients routing supply chains away from the UK due to Brexit," said Rob Dobson, director at IHS Markit.
South Korea also released PMI on Monday, and the data showed export weaknesses were hitting the country hard.
"Key gauges of economic health such as output, new orders and employment all declined," according to the report adding "weakness on the international front also remained a prominent headwind, with export sales falling further."
August's figure of 49.0 was actually up from July but still remained at a low level of optimism.
In terms of the tariffs, South Korea semi-conductors were particularly hit hard according to the Wall Street Journal, who added that "exports to China fell 21.3% in August compared with the same month a year earlier, driving an overall 13.6% decline in exports."
"Slowing growth across APAC and Europe continues to impact South Korea's crucial electronics and automobile industries, highlighted by the sustained downturn in export orders," said Joe Hayes, an economist at IHS Markit.
Globally, JPMorgan noted that manufacturing remains weak.
"Geopolitical uncertainty weighing on business capital investment remains the main drag on global industry," Olya Borichevska, from global economic research at JPMorgan, said in a note this week. "Developments on this front need to improve for industry to lift."
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