Listen: The Decisive | Episode 5 - PMI in Focus: Midyear pulse check, reshoring, outlook survey

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You are listening to The Decisive Podcast: insights and analysis to empower confident decision-making.

Paul Smith

Hello. I'm Paul Smith, an economist at S&P Global Market Intelligence, specializing in the production of our Purchasing Managers' Indices. And on today's podcast, I'm joined by colleague and fellow economist, Andrew Harker. So, Andrew, I hope you've got some great content lined up for us.

Andrew Harker

Yes, Paul. Today, I'm looking forward to talking about some research we did recently on supply chain realignment and also thinking about what's to come over the second half of the year with the help of our Business Outlook Survey data.

Paul Smith

Sounds very good. So, we'll get on to that in a little while, but I thought it would be a good idea since we've hit the midpoint or we're a little bit past the midpoint, but in terms of economic data, we've hit the midpoint of our year, 6 months of PMI data now available for people to go and look at. I thought we'd give a little bit of an overview of the data of the...

Andrew Harker

Gone quickly, hasn't it, this year so far?

Paul Smith

It has very quickly. Lots happening as always in the global economy. So yes. So taking a look at our JPMorgan Global Composite PMI, that number for June came in at 52.9, which was down from 53.7. I think as always, it's wise just to remember what we mean by the numbers.

So, any number above the crucial 50 no-change mark indicates growth of the global economy, below signals a contraction. And the further we are from that 50 no-change mark, the stronger the implied rate of change.

So a little bit softer in terms of growth in June but still quite a solid rate of expansion. That was actually the second-fastest growth we've seen in just over a year. And if you wanted to put that into kind of global GDP growth terms, then we were expanding at around about an annualized pace of about 3%, which again is quite a steady pace, probably a little bit softer than trend-level growth, but there or thereabout.

So, I think overall growth is quite resilient recently despite ongoing tightness in the exact monetary policy and the like. And probably what's a key takeaway, of course, in the first half of the year and has continued has been an ongoing slowdown or decline in inflation rates also to around trend levels.

So, I think that the so-called soft landing for the global economy definitely remains in sight where we've got some growth and inflation falling towards target levels around the world. Another positive development has been ongoing employment growth. That picked up to a 1-year high. I can say, overall, a fairly steady and reasonable picture.

When we start to look a little bit further out, though, things become a little bit more complicated. In the expectations amongst PMI survey respondents, they actually fell to their lowest level since last November. I think that seems in part due to elections we've seen recently: India, France, the U.K., of course. And then further out, we've also got the U.S. presidential election in November.

I think that's something to bear in mind when we're thinking about the outlook for the global economy. But as ever, that's the global picture. I think it's probably worth taking a little bit of time to look at some of the differences that might be occurring across different regions and countries.

Andrew Harker

Yes. I was having a look at that myself, and there are quite a few differences actually at the national levels. Looking at, say, the U.S., for example, grew pretty strongly in June. It was the fastest pace of expansion for more than 2 years. India continued to power ahead and has been the case for a while now. India has been growing really strongly.

But on the other hand, there were some signs of weakness elsewhere. So I saw there was a renewed fall in output in Japan, some parts of the Eurozone continuing to struggle, particularly France and Germany to some extent.

But the one that kind of jumped out at me as being one of the worst performance in June was Canada actually, and they had quite a solid reduction in output after a rise in May. But I was looking back for the past few months, the data hadn't been that great. So I know that's a report you cover, isn't it, Paul, for us on a monthly basis. So do you have any insights on what’s holding the Canadian economy back a bit at the moment?

Paul Smith

Yes, you're right. It's one thing that I take a pretty close look at on a monthly basis. So the June downturn, as you've quite rightly identified, was predominantly service sector-led. And the manufacturing economy in Canada has been bumbling along a little bit and in slight contraction territory, but not huge differences or not huge changes recently.

Whereas in services, we actually had a return to growth in May. And I think there was some hope, of course, that we'd see a good, solid turnaround in performance. But in June, we actually saw a return to contraction territory and quite a solid rate of contraction actually, really a return to the malaise that we've seen in that sector for the past year or so, really characterized by quite soft sales trend.

I guess what you always ask is, what's the reason for this? And I think predominantly based on especially what our panelists tend to tell us is I think financial conditions in a broad sense remained quite tight. Whereas we've had noticeable slowdown in things like input cost inflation and output price inflation, cost inflation was actually the lowest level we've seen since the start of 2021. So price pressures are unwinding.

The challenge, of course, is that prices themselves remain very high. They're just rising at a slower rate here. And then on top of that, we've also got continued tightness in monetary policy or high elevated interest rates. Although, of course, the good news is the Bank of Canada has started the process of reducing and loosening policy in recent months.

Question and Answer

Andrew Harker

Yes. So, you think that loosening of policy and the slower inflation rates you spoke of will help to reinvigorate demand a bit in the coming months?

Paul Smith

I think that the blocks are slowly moving into place. But I think it's something that, for me, when I look at Canadian service providers and their outlook themselves for the coming year for activity particularly, it seems predicated on both, shall we call them, events actually occurring.

But inflation is completely eradicated, if you like, or squeezed from the system or the economic system, and rates do continue to fall. They -- firms are acutely aware really that these impacts and the high cost of living in general has predominantly weighed on demand recently and remain a little bit wary of whether these things are -- could completely occur in the coming months.

Andrew Harker

Yes. Something I've noticed actually in a few of the surveys that I write the reports for is where firms are confident, in some cases, that is predicated on interest rates starting to come down or continuing to come down in the case of places where they've already started coming. So yes, something to watch out for really over the second half of the year, isn't it?

Paul Smith

Yes, absolutely. Look, it's worth noting, in Canada, we continue to perform quite well in terms of things like employment. We get lots of reports from survey panelists noting reports of, say, labor shortages, and they want to continue to employ additional workers.

As I said, inflation has moved down quite predominantly. But what's interesting is stark contrast to its neighbor, the U.S., where, in terms of economic growth, the U.S. PMI data has proven quite resilient in terms of its headline activity indices recently, especially in the service sector.

We're quite fortunate here. We can take a little bit more of a deeper dive into that type of data. And when you look at broad sector data, you tend to find this story a little bit more about consumer spending in the U.S., broad service sector data. We cover things like health care, industrials, tech, et cetera.

When you look at our ranking, consumer services remains one of the better performing broad sectors in the U.S. So it does imply some resilience in that area of the U.S. economy at the moment. As I said I don't think that we want to spend too much time on the U.S. today.

I think our general spirit of this podcast is generally to focus on some of the surveys that we do that go a little bit more, shall we say, under the radar. So I thought it'd be good if we could maybe spend a little bit of time looking at a country that is, of course, heavily influenced by economic developments in the U.S. And that's Mexico, where we have a manufacturing PMI survey.

Andrew Harker

We do, yes. We're going to do a Carl Lewis-style leap over from Canada to Mexico jumping over the U.S. And yes, as you mentioned, we have a manufacturing survey in Mexico. And actually, if you look at the latest data, you can see on the face of it some positivity, so output and new orders rising there. So that's good to see.

But it's fair to say there are some headwinds as well. Business confidence actually remained pretty muted in June, and there are a number of challenges on the supply side. Employment fell at this choppiest pace in over 2 years, and there are also challenges in supply chains.

So there are issues with raw material scarcity, delays at customs, water shortages. And we actually saw stocks of inputs that manufacturer's down to the largest extent since October 2022. And so these issues on the supply side actually led to backlogs of work rising quite sharply in June. Firms weren't able to get through their orders as quickly as they would have liked to.

And some of these issues also potentially impact on Mexico's attractiveness as an investment location really and somewhere where firms might be looking to reshore manufacturing production as supply chains realign. And that's something that, as I mentioned at the start of the podcast, we've done a bit of research on recently.

Paul Smith

And just running back a bit there, I quite enjoyed your Carl Lewis reference ahead of the Olympics in a couple of weeks' time.

Andrew Harker

I’m getting excited.

Paul Smith

You can. And to show my age, I do remember Carl Lewis as a tremendous Olympian all them years ago. But I guess bringing you back, of course, to our economics discussion, you're talking about reshoring there. I think it would be good just to define what we mean by reshoring because I think it's quite a catch-all term as far as I understand anyway.

Andrew Harker

For the purposes of this research that we've done, we have used reshoring as a catch-all term to talk about realignment of supply chains that's been going on in recent years, primarily since the pandemic. And that was a big moment in terms of supply chains.

If you remember, the issues that took place following the pandemic with difficulties getting hold of goods, shipping was all in the wrong place, et cetera, I think those issues have been rehearsed quite a lot over the past few years, including on our podcast on numerous occasions.

Those issues maybe led a lot of companies to rethink how their supply chains were set up, whether they needed to shorten them, bring them closer. And there are also other issues as well such as with geopolitics. Sometimes firms might want to move their supply chains to a location where they maybe have a more reliable relationship with the country or you also get things like domestic policies as well in countries.

So when you think about the CHIPS Act in America where they're looking to bring more electronic goods and semiconductors production back into America. And those sorts of things can also mean that companies want to move their locations and then shorten their supply chains. So we kind of use reshoring as a catch-all term to apply to all of these different effects and the research that we've done.

Paul Smith

The research that you have done from what I can gather is the second time you've taken a look at Mexico reshoring. Being the econometrician person or things that I like to do, that's a start of a time series. So you can compare the results from this year to last year, of course. So maybe you could take us through some of them findings.

Andrew Harker

Yes, that's right. So this survey that we asked initially last year, as you mentioned, Paul, and to explain, we asked 3 different questions to our panel of manufacturers. The first was to think about whether they've seen or be able to take advantage of near-shoring, in this case, opportunities over the previous year then to look forward over the coming year and say whether they expect to see their demand improve as a result of near-shoring and then finally, to think about some domestic challenges which might prevent them from fully realizing the gains from these trends.

So what we saw last year was around 20% of manufacturers in Mexico had benefited in terms of demand as a result of reshoring or near-shoring of supply chains. And around 1/3 were confident that they would do over the coming year.

Now we fast forward to this year's results, we see that the proportion of companies that have seen growth is about the same really, about 20% still. So maybe that's a little disappointing because obviously, 1/3 of the firms thought that they would have seen some gains over this year, but actually, it's only coming at about 20% again.

And I think that's sort fits in with some of the research I've seen from our colleagues in Market Intelligence saying that some of the projects maybe that have been announced by the international companies have just still just been announced and not really come to fruition yet.

But what I would say is that the firms are even more optimistic now than they were last year in terms of realizing some gains. So that's up to nearly 50% now. So it's maybe that these things are taking a bit longer than they thought to fully materialize, but they're still confident that the underlying trends are there.

Paul Smith

Yes. We think they will be realizing the time, but they've taken a bit longer than expected. But what do you think might be the reasons for that?

Andrew Harker

These things can take a bit of time to set up once you announce investment and these things are long-term changes, aren’t they? So they can take a bit of time. But if we look at what the panelists themselves are saying about challenges to gaining from reshoring, one of the key things is cost and availability of capital and also security issues.

So things like being able to fully secure freight and supply chains is an issue that comes up when firms are thinking about this. And that sort of feeds into what we were talking about earlier in terms of the current issues that firms are facing on a monthly basis. So definitely links through there.

Paul Smith

Yes. I guess some of that might be, say, specific to particular area or local – region or local country. Are there any other areas of the world that we've also conducted some research and maybe have some differences to the Mexican case?

Andrew Harker

Yes. So, what was really nice this year is that we expanded the research out to include 3 other countries, so Malaysia, Vietnam and Turkey. These were suggested to us by our supply chain colleagues as places that would be quite interesting to conduct the research in. So, it's quite nice that this year instead of just having one country from Mexico, we've got 4 that we can really compare and contrast against.

And what we saw was the firms in Vietnam were the ones that really had seen the most benefits from these reshoring trends so far. Over the past year, around 1/3 of firms in Vietnam said they've done so compared to about 20% in the other countries, so Malaysia, Turkey and as I mentioned earlier, Mexico.

But also, what's really interesting is to look at the different challenges. As you mentioned, Paul, some are specific to a particular country or region, and some are quite common. So, the cost and availability of capital was really a big thing across all the 4 different countries that we covered. That was an issue that a lot of firms are worried about really.

But then there were some interesting differences as well. So we mentioned the security aspect in Mexico. In Turkey, it was more often about shortages of skilled labor, whereas in Vietnam, it was having access to the right technology to be able to fully benefit from these trends.

Malaysia, and then in other countries as well, it's a lot about competition. So, if you think about it, a lot of different parts of the world or different countries, as supply chains move around, are competing for this investment. So that's something they've all got to contend with as well really.

Paul Smith

Yes. I guess that's all them considerations, right, go into that assessment about reshoring. And in general, all investment decisions are based around assessments of the outlook, whether that's economic, political, domestic, international.

I think we can broaden this out a little bit, can't we, because we do conduct what we call a Business Outlook Survey 3 times a year, where we ask firms from our PMI-based panels to give their thoughts for the year ahead on subjects like their investment activity, what they think prices will do, how they think employment will develop, et cetera.

Like I said, it's really the same firms answer our PMI surveys but rather than the monthly PMI surveys are really based around factual changes in particular there. Whereas here, we're asking firms to think about the outlook for many variables.

I thought maybe we just released our latest survey findings, haven't we, just a few days ago. So hot off the press. I wonder whether you could give us a little bit of an overview of what the numbers are saying at the global level for the coming 12 months.

Andrew Harker

Yes. So at the global level, optimism’s pretty stable really, not real much change from the start of the year. So we last conducted the survey in February and then through to June, hasn't really been much change at the global level. Something like a wait-and-see attitude among firms at the moment for various reasons.

We can dig in again. We mentioned with the global PMI how there are differences at country level. That's the same with the business outlook. Notably, the U.S. confidence was up to the highest in more than 2 years there. So it looks like a continuing decent performance there. Confidence was up in Japan as well, but a little weaker in the BRICS economies and those emerging markets.

Paul Smith

Yes. Just looking across at what firms are telling us, it is a mixture of some longer-term structural changes and short-term economic factors. So we get lots of reports that we will see lots of opportunities, I think, with investment in new technologies like artificial intelligence, the green/renewable energy transition.

They’re seen as quite important. But again, as we've mentioned earlier on when we talked about Canada, lower inflation and interest rate cuts are also really quite crucial or seen as crucial to reignite growth in the short term and -- yes?

Andrew Harker

If you look at sort of the inflation indexes on the Business Outlook Survey there, they're similar, just not really much changed from the start of the year. So not really much sign of a marked easing of inflation expected really over the second half of the year, I think.

Paul Smith

No, absolutely. So I think there's a few things where we feel like we're in a bit of a wait-and-see mode at the moment, don't we, with either the global PMI or the Business Outlook Survey. Looking at the U.S. Business Outlook Survey, for instance, inflation's still seen as a bit of a threat to the outlook.

And then, of course, we've got people probably seeking some clarity really from the upcoming U.S. election in November. I think they're going to be key to unlocking growth in the year ahead. I think it's something that we were hoping to dig a little deeper into our next podcast really, the effects of these elections and, of course, upcoming elections on the PMI surveys. But I think that's for next time, isn't it?

So for now, hopefully, we've covered quite a lot of ground on today's podcast and given an insight into the midyear performance of the global economy and the outlook in the coming months. But for today, though, we've run out of time. Thanks, of course, to Andrew for your insights as always. And we look forward to seeing you all later in the year for our next podcast.

Kristen Hallam

Thank you for listening to The Decisive Podcast from S&P Global. Please subscribe and join us for next week's episode. Until then, stay curious and stay informed.