Global production surges | CNN Business

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Manufacturers worldwide are grappling with weakened demand as the economic outlook for the industry darkens.

Factories in the United States and across the euro zone reported a drop in new orders for manufactured goods in May as they worked through their backlog, according to recent business surveys released by data firm S&P Global. It is unclear how long the backlog, which swelled in the early days of the pandemic, will sustain the industry globally.

S&P Global data showed the US manufacturing sector slipped into recession territory in May. A similar survey released by the Institute for Supply Management showed the industry contracted for a seventh straight month in May, at a faster pace than the previous month.

Data from the US government also shows what could be the beginning of a consistent decline. The Commerce Department reported Monday that factory orders excluding transportation, a volatile category, fell for a third straight month in April. Excluding defence, factory orders were down in four of the six months to April.

Among eurozone manufacturers, output, new orders and order backlogs fell in May as the sector contracted at a faster pace that month, according to figures from S&P Global. Industrial production in the 20-nation currency area fell sharply in March, mainly due to a drop in Ireland. The indicator measures the output of manufacturers, miners and energy companies.

The situation is not much better in China.

Business conditions in China’s manufacturing industry, the world’s largest, improved in May, according to the Caixin manufacturing Purchasing Managers’ Index. It was a temporary sigh of relief for investors who feared growth was stalling in the world’s second-largest economy, but fresh data showed exports from China fell 7.5% in May from a year earlier, the biggest decline since January, as imports fell further. that month.

China’s faltering trade figures reflect weak demand for Chinese goods, and it comes on top of other economic problems facing the country such as rising unemployment and a deep downturn in the real estate sector.

Globally, manufacturers’ optimism fell to the lowest level since December, according to the JPMorgan Global Manufacturing PMI.

“While activity in the manufacturing sector 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 industry remains bleak, and new export orders in particular are falling sharply.”

Consumers worldwide were forced to cut spending on services in 2020 due to the pandemic, resulting in a boom in consumer goods purchases. It also rapidly increased manufacturers’ order reserves.

Consumers have since moved their money back into services as countries around the world lifted pandemic-era restrictions. In both the US and Europe, hospitality companies are preparing for a record summer of travel. The ongoing shift towards spending on services, combined with tighter economic conditions due to central banks raising interest rates, is creating problems for commodity producers, economists say.

China’s recent reopening, after years of draconian pandemic restrictions, was expected to give the global economy “new momentum”, according to a forecast by the International Monetary Fund. But the country’s recovery has been underwhelming. The opportunity for China to revive global economic growth is slipping away.

“We’ve seen a lack of demand for goods around the world now because of this acceleration in the pivot from goods to services, and that’s why you’re starting to see the services sector (CPI) pick up,” said Tom Garretson, senior portfolio strategist at RBC Wealth Management US. “And there’s been a lot of anticipation for China’s reopening, but obviously that hasn’t materialized.”

Central banks continue their fight against inflation. Rising interest rates tame inflation by cooling demand, ultimately causing banks to tighten their lending standards. In the US, that has been the case, especially after the failures of three regional banks in recent months. Credit conditions have also been tightened in the eurozone, more so after the forced merger of the Swiss banks Credit Suisse and UBS.

The Federal Reserve, America’s powerful central bank, has raised interest rates 10 times in a row to a level that is “sufficiently restrictive”, according to Fed Chairman Jerome Powell. The European Central Bank has also raised interest rates aggressively to fight inflation in the Eurozone and has not signaled it is willing to stop yet.

Durable goods, which are defined as products that last at least three years – such as cars and white goods – are often bought on credit, so tightening credit conditions will inevitably weigh on manufacturers. That could eventually lead to global manufacturers trimming their workforces if demand for goods continues to weaken and their order backlog shrinks further.

A recession is defined as a broad economic downturn that includes weakness in consumption. Purchases of discretionary goods are among the first consumers cut back in downturns, so broader signs of economic weakness do not bode well for manufacturers.

Economists at the Fed confirmed their forecast of a mild US recession later in the year, although the country’s labor market has remained stable. Revised data this week showed the 20-nation eurozone tipped into recession around the turn of the year. The bloc’s gross domestic product fell 0.1% in the first quarter from the previous three-month period, following a 0.1% decline in the fourth quarter. Although economic output in 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 around the turn of the year, also pushing into recession. The German economy shrank 0.3% in the first quarter from the previous, after a 0.5% decline in the fourth quarter.

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

Meanwhile, China’s economy grew 2.2% in the first quarter from the previous three months, largely as a result of the country’s reopening as Chinese consumers began eating out and traveling again. Compared to the same period a year ago, China’s GDP grew by 4.5% in the first three months of the year. All eyes will be on May data that measures China’s economic performance.

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

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

A National Association of Manufacturers survey released this week found that 67% of U.S. manufacturers surveyed were optimistic about their company’s future, the smallest share since the third quarter of 2020. Retaining quality workers, a weak domestic economy and an unfavorable business climate were manufacturers’ greatest challenges.