Among all the various negative news items in the financial press these past few days were reports citing the latest indicators of manufacturing activity in various global regions.  In the U.S., the Institute for Supply Management’s PMI index was reported as 50.9 in July, down from 55.3 reading in June. The 4.4 percentage point drop is a significant indicator and the July PMI stands as a level achieved back in the July/August 2009 time period when various manufacturing industries were beginning to climb out of the past recession.   More troubling was that other indices, especially the new orders index fell as well.  The new orders index fell to 49.2, which indicates contraction for the first time since June 2009.  The inventory index also fell 4.8 percentage points to 49.3, which is also an indication that manufacturing is reducing on-hand inventory without significant replenishments. The only industries reporting higher inventories in July were high technology, machinery and transportation equipment.  Most consumer related industries indicated falling inventories.

Across the globe, China’s PMI Index, reported by the China Federation of Logistics and Purchasing and China’s National Bureau of Statistics fell to 50.7 in July, two tenths of a percentage point lowers than June, but reflecting the fourth consecutive monthly decline. Separately, HSBC’s China Purchasing Managers’ Index also dropped to a level of 49.3, a  signal that China’s vast manufacturing sector is shrinking slightly as tight monetary policy and weak global demand continues to impact factories. Declines were also reported in new orders and export growth.  July marks the beginning of pre-holiday orders which are exported to global markets from August through October, and a continued flat or downward trend would be a reflection of lower end-of-year holiday sales.

Elsewhere across the globe, the Euro Zone PMI index across the 17 nation euro zone fell to a 23 month low of 50.8, below the 52.0 level in June, and way below the 52.7 level expected by economists. U.K. PMI also fell to 49.1 from 51.4 in June.

If there is any positive news, it reflects on indications that input prices of commodities and other components continue to show signs of decreasing.  The U.S. ISM price index fell 9 percentage points in July, from 68 to 59 which is a definite indicator of erosion to previous higher inbound prices.  China’s price indicator also fell, but not at the same precipitous rate, dropping to 56.3 from 56.7 in June.

In our Supply Chain Matters commentary in early July, we noted some optimism in continued manufacturing momentum for the U.S. while China remained on a downward trend.  In just a short month, reflected in constant negative news for Euro Zone country and potential U.S. debt defaults, the picture is not as positive.   While a single month does not reflect a long-term trend, the magnitude and speed of the current slowdown in global manufacturing is certainly cause for concern and continued monitoring.

Beyond the after-effects of the Japan earthquake and tsunami that occurred in northern Japan in March, warning signs should be extended around the prospects for any robust second-half global supply chains activities.  The one exception may be perhaps global commercial aerospace activity and the production of stress and anxiety relief drugs.

Bob Ferrari