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Global PMI™ holds at three-year low in June with nine of 26
sectors in decline
Steep falls in machinery & equipment and tech sectors point
to sharply weakened capex
Auto sector decline gathers momentum
Second quarter growth led by financial services
The latest global PMI data showed the pace of worldwide economic
growth remaining stuck at a three-year low in June, but a detailed
analysis of the data showed deepening downturns in some key
sectors.
Growth drags and drivers
At 51.2, the JPMorgan Global PMI™, compiled by IHS Markit,
remained unchanged at a three-year low in June, having lost
momentum steadily over the course of the past year. The index,
which measures changes in total output across both manufacturing
and service sectors, revealed that the manufacturing sector
continued to act as a major drag on growth. Factory output fell in
June for the first time since October 2012. Service sector growth
remained more resilient, and even perked up slightly in June,
though remained in its worst growth spell for three years.
It is possible to dig deeper to see the main growth drags and
drivers via the detailed sector PMI numbers, which provide unique
economic indicators for some 26 sectors globally (as well as for
Europe, Asia and - to a broader degree - the US).
Of the 26 global sectors, the number reporting lower output
eased from 11 in May to nine in June, but some of those sectors
remaining in contraction sent especially worrying signals about the
health of the global economy.
Two sectors in particular are machinery & equipment and
technology equipment manufacturing, as these are key indicators of
business investment. Both have trended sharply lower in recent
months.
Falling business investment
Production of machinery and equipment fell in June to an extent
exceeded only once (last February) since detailed global sector PMI
data were first available in late-2009. Output of this sector has
fallen continually so far this year, representing the worst
performance since the global financial crisis.
Production of tech equipment meanwhile dropped at the sharpest
pace since November 2012, down for the third time over the past
four months.
A broader PMI gauge of global investment goods production showed
a similar weakness, with output down for a sixth month in June.
Although some easing in the rate of decline was evident in the
latest month, the average drop in output in the three months to
June was the steepest calendar quarter decline since the final
three months of 2012 (a downturn which was subsequently followed by
a drop in official global fixed capital investment data). Official
data have already shown annual global business investment growth
cooling sharply up to the first quarter of the year, running at
less than half the pace seen a year earlier, closely following the
trend in the PMI data. The survey data therefore point to a further
moderation in the second quarter.
The downturn in capex spend signalled by the global PMI data
highlights the extent to which rising geopolitical uncertainty has
led to a broad pull-back in business spending which is likely to
subdue economic growth. However, with business investment being a
major determinant of future productivity and profitability, the
drop in capex spend signalled is a particular red flag for future
corporate earnings.
Auto sector woes deepen
Another sector of concern is automobiles, which sat at the foot
of the global sector PMI rankings in June as output fell at the
second-steepest rate since 2009.
The survey data indicate that car sector output has now fallen
continually since last September. However, whereas declines late
last year were in part caused by temporary disruptions such as new
emissions regulations in Europe (which many therefore saw as being
temporary), the ongoing weakness in 2019 paints a more worrying
picture of weakening demand for autos.
Other indicators added to the auto sector gloom: the sector's
PMI new orders index signalled a further steep decline in business
inflows, leading to a sharp drop in car industry order book
backlogs.
Such a weakening of orders books often leads to cuts in
employment, so it was little surprise to see employment falling in
the autos sector in June, with jobs being lost globally at the
sharpest rate for over two years.
With the June survey also seeing a record drop in input buying
by auto makers, a further cut in production is indicated for
July.
The PMI data tally closely with official data on auto
production. According to industry data collected by IHS Markit,
global light vehicle production fell in year-on-year terms
throughout much of the second half of 2018 and continued to slide
in the first quarter of 2019. Estimates based on partial data point
to the rate of decline having accelerated in April before easing
somewhat in May. Encouragingly, the forecast model points to a
stabilisation of production in the second half of 2019 and modest
return to growth in 2020. However, the PMI data will need to turn
sharply higher in coming months for growth to stabilise, suggesting
some downside risk to the brighter near-term outlook.
Financial services lead second quarter
expansion
Looking at the best performers, the global PMI sector rankings
were led in the three months to June by 'other financials' (which
covers all financial firms other than banks and insurance
companies) followed by software & services. With banking
services and insurance also in the top seven sectors, financial
services as a whole notched up the best performance of all the
broad industry sectors in the second quarter.
The best performing manufacturing sectors were food and drink,
with pharmaceutical & biotech coming next at eleventh place,
all of which are widely seen as typical 'defensive', non-cyclical
sectors.
Chris Williamson, Chief Business Economist, IHS
Markit
Tel: +44 207 260 2329
chris.williamson@ihsmarkit.com
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.
