Edge and Odds

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Edge and Odds

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JAPAN MANUFACTURING PMI

Manufacturing conditions in Japan worsened at a weaker pace at the start of the third quarter of 2016. Production decreased at the slowest rate since March, helped by a softer fall in new order intakes. Buying activity contracted further, while employment growth picked up slightly, albeit remained marginal overall. Meanwhile, the stronger yen/dollar rate weighed on international demand, with new exports declining at the strongest rate in three-and-a-half years.

The headline PMI posted 49.3 in July, up from 48.1 in June, thereby signalling a slower rate of deterioration in Japanese manufacturing conditions. Moreover, the latest reading was the highest since February 2016.

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Contributing to the overall downturn in manufacturing conditions was a further fall in production. According to panellists, a reduction in foreign demand resulting from the appreciation of the yen led to a fall in output. However, the rate of contraction was only marginal and weaker than the average over the current five-month sequence of declines.

Similarly, new orders decreased at the slowest rate since February. Where total new work declined, surveyed companies mentioned falls in both domestic and international demand.

New exports orders contracted for the sixth month running in July. In fact, the rate of decline was the sharpest since January 2013. Firms linked a reduction in trade volumes to terrorism, European economic demand weakness and a loss of global competitiveness resulting from the appreciation of the yen against the dollar. All three market groups signalled contractions in foreign demand, with intermediate goods producers recording the most marked fall.

Despite worsening conditions, manufacturers hired additional workers in July. However, the rate of job creation was weaker than the average over the current ten-month sequence of growth.

On the price front, input prices declined at the sharpest rate in nearly four years. Lower cost burdens were attributed by firms to a fall in imported raw material prices stemming from a stronger yen/dollar rate. As a result, charges were reduced at the fastest pace since January 2013.

U.S. MANUFACTURING PMI AT 52.9

MARKIT’S PMI:

U.S. manufacturers signalled a relatively strong start to the third quarter of 2016. Output growth picked up markedly since June, driven by a robust and accelerated expansion of incoming new work.

While domestic demand remained the key source of growth in July, there were also signs of renewed momentum in external markets. Reflecting this, new export sales expanded at the fastest pace since September 2014. Increased workloads also contributed to rising payroll numbers and a solid upturn in input buying during July.

The seasonally adjusted Markit final U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) registered 52.9 in July, up from 51.3 in the previous month and comfortably above the postcrisis low seen in May (50.7). The final PMI reading for July was unchanged from the earlier ‘flash’ reading (52.9). Improving business conditions reflected stronger rates of output, new order and employment growth during the latest survey period.

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July data signalled a sustained rebound in production volumes across the manufacturing sector. Higher levels of output have been recorded in each of the past two months, with the latest expansion the fastest since November 2015. Anecdotal evidence cited greater inflows of new work and supportive economic conditions.

New business growth continued to recover from May’s post-crisis low, with the latest improvement in new order books the strongest for nine months. At the same time, export sales increased at a modest pace in July, which manufacturers linked to successful promotional initiatives and entry into new markets. Rising workloads in turn contributed to an accumulation of unfinished business for the second month running.

Payroll numbers increased in July, which continued the upward trend recorded over the past three years. Moreover, the rate of job creation picked up to its strongest since July 2015. Manufacturers noted that faster new business growth and the launch of new products were key factors boosting staff recruitment at their plants.

Meanwhile, higher levels of incoming new work also resulted in greater volumes of purchasing activity during July. Input buying has now risen for three months running and the latest expansion was the steepest since October 2015. However, manufacturers remained cautious in terms of their inventory holdings, with stocks of finished goods and pre-production inventories both falling since the previous month.

Manufacturers signalled a further moderate increase in average cost burdens in July, which extended the current period of input price inflation to four months. Survey respondents widely commented on higher steel prices. At the same time, factory gate charges increased only marginally in July, with firms noting that strong competition for new work continued to exert pressure on operating margins.

THE ISM:

The July PMI® registered 52.6 percent, a decrease of 0.6 percentage point from the June reading of 53.2 percent. The New Orders Index registered 56.9 percent, a decrease of 0.1 percentage point from the June reading of 57 percent. The Production Index registered 55.4 percent, 0.7 percentage point higher than the June reading of 54.7 percent. The Employment Index registered 49.4 percent, a decrease of 1 percentage point from the June reading of 50.4 percent. Inventories of raw materials registered 49.5 percent, an increase of 1 percentage point from the June reading of 48.5 percent. The Prices Index registered 55 percent, a decrease of 5.5 percentage points from the June reading of 60.5 percent, indicating higher raw materials prices for the fifth consecutive month. Manufacturing registered growth in July for the fifth consecutive month, as 12 of our 18 industries reported an increase in new orders in July (same as in June), and nine of our 18 industries reported an increase in production in July (down from 12 in June).

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