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Global manufacturing PMI buoyed by strongest new orders growth
since April 2018, with trade flows also reviving
Demand outstrips supply, leads to higher prices
Job markets show signs of steadying as firms seek to boost
capacity
Business expectations hit highest since May 2018
Global manufacturing output rose further in September as growth
of new orders accelerated and exports reviving, pointing to a
strong end to the third quarter as the world's factories continued
to recover from COVID-19 related lockdowns. Job losses also eased
to indicate a near steadying of factory payroll numbers as firms
boosted capacity, with hiring also encouraged by a rise in future
optimism to the highest since May 2018. Meanwhile demand often
exceeded supply, driving global factory input prices higher.
Sustained rebound in output
The JPMorgan Global Manufacturing PMI, compiled by IHS Markit
from its proprietary business surveys, rose from 51.8 in August to
52.3 in September, its highest since August 2018, buoyed by further
production gains.
Notes: Due to later-than-usual release dates, September 2020
manufacturing PMI data for South Korea and Taiwan were not
available for inclusion in the global figures.
Although the output index, which measures monthly changes in
production volumes, dipped slightly from 53.6 to 53.5 in September,
it remained firmly in expansion territory, broadly indicative of
global factory output rising at an annual rate of 3.6%*, which
contrasts markedly with the peak 17.7% rate of decline indicated
back in April. To clarify, the index is not indicating that output
is 3.6% higher than a year ago, but merely that production is now
growing at a rate comparable to 3.6% per annum, representing a
further recovery of the output lost during the pandemic.
*Since 2007, when IHS Markit's PMI data for the United
States were first included in the index, the global PMI's output
gauge has exhibited an 83% correlation with the annual rate of
change of official production data, achieved with the PMI acting
with a lead of three months. Importantly, the PMI is also published
several months ahead of the comparable official data, underscoring
how the PMI provides a very accurate advance guide to changing
output trends.
An OLS regression can be used to determine what a PMI
reading implies in terms of annual growth . The implied annual
growth rate can be estimated as follows:
Global manufacturing output (annual % change) =PMI output index x 0.0101 - 0.506
Order books buoyed by recovery in trade
The slight cooling of production growth looks likely to be
temporary, given an acceleration in growth of new orders during the
month to the fastest since April 2018, which hints at strengthening
demand for goods globally.
Especially encouraging was a further improvement in the global
PMI's exports index, which indicated the return of global trade
growth with the largest increase in worldwide export orders for
two-and-a-half years.
Inventories meanwhile fell during September, both in terms of
finished goods and stocks of inputs. The decline in inventories was
often unintentional, reflecting sales and production needs often
outstripping expectations. The survey's new orders to inventory
ratio - a guide to the extent to which production is likely to rise
in coming months - consequently rose in September to its highest
since December 2017.
Demand outstrips supply, pushes prices
higher
The survey also brought indications that output was in part
constrained by shortages of inputs, with the incidence of supply
chain delays rising compared to August. Although below the peak
seen at the hight of the COVID-19 outbreak earlier in the year,
when many factories (notably in China) closed, the lengthening of
lead times highlights the extent to which demand continues to
outstrip supply.
The imbalance of demand and supply led to further upward
pressure on prices, with average input costs rising globally for a
fourth successive month in September, rising at the steepest rate
since December 2018 (albeit with the rate of increase well below
the 2018 peaks).
Job losses ease as firms seek to expand
capacity
A further encouraging signal from the global PMI was provided by
the Backlogs of Work Index, which tracks the volume of orders that
firms have not yet completed or started to process. Rising levels
of backlogs of work tend to result in companies taking on more
staff to deal with the additional workloads and vice versa. Hence
the Backlogs of Work Index provides an advance indication of labour
market changes, acting with a one-month lead on the PMI's
employment index, exhibiting a correlation of 89%.
In September, the backlogs of work index rose globally for the
second successive month, indicating the largest rise in uncompleted
orders for two years (excluding February's spike, which was caused
by supply disruptions amid shutdowns in China).
Job losses consequently moderated, with September seeing the
smallest cut to manufacturing payrolls globally since January.
Rising backlogs therefore bodes well for net job creation to be
recorded in October for the first time since last November.
Optimism improves
The September survey also saw manufacturers become increasingly
positive about future prospects, with expectations of output over
the coming year rising to the highest since May 2018.
The brighter outlook reflected expectations that global demand
for many goods will continue to rise in coming months as life
gradually returns to normal in increasing numbers of countries as
the impact of the pandemic eases. However, worries persist about
resurgent COVID-19 infection waves, the prospect of rising
unemployment in many countries, as well as increased political
uncertainty in the US ahead of the presidential election, all of
which represent downside risks to the outlook.
Chris Williamson, Chief Business Economist, IHS
Markit
Purchasing Managers' Index™ (PMI™) data are compiled by IHS Markit for more than 40 economies worldwide. The monthly data are derived from surveys of senior executives at private sector companies, and are available only via subscription. The PMI dataset features a headline number, which indicates the overall health of an economy, and sub-indices, which provide insights into other key economic drivers such as GDP, inflation, exports, capacity utilization, employment and inventories. The PMI data are used by financial and corporate professionals to better understand where economies and markets are headed, and to uncover opportunities.
