With the bulk of May 2019 global-wide production and Supply Chain activity indices now being reported, May 2019 represented crossing the threshold to an overall level of contraction.  Global trade volumes

The closely followed J.P. Morgan Global Manufacturing PMI produced by J.P. Morgan and IHS Markit, reported the May 2019 PMI as a value of 49.8, representing the lowest reading since October 2012, and now in the contraction quadrant of negative growth. The report authors noted: “Business conditions deteriorated to the greatest extent in over six-and-a-half years, as production volumes stagnated, and new orders declined at the fastest pace since October 2012.

Deteriorated business conditions were noted among regions that include the Eurozone, Canada, Japan, the United Kingdom, South Korea and Taiwan. From our Supply Chain Matters lens, the common denominator were nations highly dependent on global trade growth. PMI readings for Brazil, China and the United States were noted as a few ticks above the 50 no-change mark, but tenuous, at-best. Regarding China, the separately reported official PMI index produced by China’s Statistics Ministry was reported as 49.9 in May, which represents contraction.

The May 2019 Manufacturing ISM® Report On Business®, produced by ISM, reported a May value of 52.1, down 0.7 percentage points from April’s reported level. Among the panel that makes up the qualitative and quantitative aspects of PMI value, was the comment: “Respondents expressed concern with the escalation in the U.S.-China trade standoff, but overall sentiment remained predominately positive.” Among the sub-indices, contraction was reflected in the Backlog of Orders, which declined by 6.7 percentage points and Imports, which declined by 0.4 percentage points. The Production index declined 0.1 percentage point, while Backlog Of Orders and Inventories declined by 6.7 and 2.0 percentage points respectively. Taking as a whole, these are not optimistic indicators.

A glance at other regionally focused PMI reports reflects:

The IHS Markit Eurozone report reflected continued contraction in May, with Germany representing the lowest value at 44.3, and Greece the highest at 54.5. The report narrative noted a fourth consecutive monthly drop in outputs and new orders with companies now tightening belts and cutting back on hiring and spending.  Brexit and wider geopolitical uncertainty were additionally cited.

On the topic of Brexit, there was a reported sharp contraction in the UK CIPS PMI to a reported 49.4 value in May compared to 53.1 in April, representing a 34-month low. The contraction was attributed to bloating inventories.

The Nikkei ASEAN Manufacturing PMI which represents production and supply chain related activity among seven monitored Asian nations increased a marginal 0.2 percentage points in May to a value of 50.6. Five nations recorded stronger operating activity in May which included Myanmar and Vietnam. Vietnamese producers were noted as experiencing a solid expansion in output levels and new business. Noted was that Malaysia and Singapore registered further downturns. Malaysia has remained in contraction for eight consecutive months while the latter Singapore has endured ten months of declining PMI.

Taiwan’s PMI slipped 0.2 percentage points to 48.2, reinforcing previous contraction in the prior three months.

Supply Chain Matters Perspectives

As noted in our prior blog commentary reflecting on Q1-2019 global PMI activity, the consensus of 2019 economic forecasts called for an optimistic but cautious outlook for global growth, but with meaningful downside risks. With May’s statement of global contraction, it would now appear that downside risk may be at-play.

Rising global trade tensions and the Trump Administration’s continuing aggressive stance on utilizing tariffs as a punitive tool are indeed having a cascading effect. The growing trade and tariff related actions among the U.S. and China are indeed part of this negative trending, which is cascading across other regions.

Overall, May 2019 represents the evidence of the beginnings of structural global supply and demand network changes occurring across global industry supply networks are now underway, as are the implications.

From our lens, the PMI data for May further suggests the multi-industry supply chain teams are already taking actions related to realignment of country of origin or actual alternative product sourcing actions to avoid the added costs related to tariffs. In cases of steep threatened tariffs ranging upwards of 25 percent, many businesses will have little choice but to raise end-item prices, adding to additional inflationary pricing forces across global regions.

The one thing that is becoming very clear is our 2019 prediction of unprecedented levels of global supply network challenges that rise to the level of senior supply chain and business executives.

 

Bob Ferrari