US Manufacturing PMI Preview: Trade is the measure of all things

The Institute for Supply Management will release its manufacturing purchasing managers’ index for June at 10:00 am EDT, 14:00 GMT on Monday July 1^st.

Forecast

The purchasing managers’ index (PMI) for the manufacturing sector is predicted to drop slightly to 51.0 in June May from 52.1 in May. The prices paid index is expected to fall to 53.1 from 53.2.

US Manufacturing: Unexpected revival

The US manufacturing sector had an exceptional two years in 2017 and 2018.  Long given up for dead by economists, goods manufacturing, particularly in small and mid-sized factories, was assumed to be uncompetitive with low-cost foreign plants, generally Asian, and headed to extinction. The revival in confidence and employment brought about by the change of administrations in Washington reopened factories in the mid-West and returned jobs and wages to many small communities in the US heartland.

From January 2017 through April 2019 the US economy created an average of 17,250 jobs each month for a total of 483,000 new salaried employees. Many of these positions were in the firms and industries whose employment had been hardest hit by international competition and the sourcing of factories overseas.

Manufacturing PMI: The toll of trade

The surge in manufacturing was given in the PMI surveys which for 12 months from the middle of 2017 exhibited the strongest average in a generation. The August 2018 score of 61.3 was the highest since 2004 and the 12-month moving average that month of 59.24 was the best since November 2004.

FXStreet

The US trade dispute with China began slowly in January 2018 but gathered steam throughout the year. American tariffs were answered by Chinese impositions and despite much positive talk and one truce the negotiations failed in the end to produce a treaty.

Manufacturing sentiment remained optimistic throughout 2018. November’s index of 59.3 was not appreciably below August and well above the 50 division between expansion and contraction.

The Washington budget wrangle at the end of 2018 which precipitated the partial government closure in late December struck business sentiment hard. It dropped to 54.1 and though it returned to 56.6 in January the trend since has been lower.

The likely culprit for the decline in the business outlook is not the temporary and rather common budget shenanigans in Washington but the realization that the trade argument with China is not amenable to a quick and easy solution.

Presidents Xi Jinping and Donald Trump met in Osaka, Japan at the G-20 summit and have promised forbearance and revived negotiations but markets will be more wary and less sanguine about the prospects this time around.

Each side seems to have hardened their key demands and appears prepared to wait. There is no clear path forward to achieve the comprehensive agreement both Washington and Beijing say they want.  Business executive are realizing that the much straitened terms of trade with China are likely to be around for a while.

Conclusion

The easy and unexpected optimism of the early Trump economic policies for the manufacturing sector has settled into a harsher reality that is unlikely to lighten until and when, or perhaps if, the trade dispute with China is settled. Manufacturing sentiment may get a boost in July from the Osaka détente but it will not revive until Xi and Trump sign a deal.

For now all trade and economic roads lead to Beijing and Washington.