Stansberry Research

Declining Manufacturing Output and Global Pricing Pressures Are Slowly Easing

Stansberry NewsWire

The global manufacturing sector is primed for a slow recovery in 2023...

Global manufacturing output fell for a fifth straight month in December 2022, according to the JPMorgan Global Manufacturing Purchasing Managers' Index ("PMI") compiled by S&P Global.

At the start of last year, manufacturing conditions were best described as a barren landscape of struggling suppliers. Firms had a tough time attaining enough raw materials and labor. However, 12 months later, as global demand began to plummet and inventories were fraught with excess, producers cut back sharply on input purchases and reduced labor numbers.

This led to a pivot in pricing pressures in the fourth quarter of 2022. Supply chains began to achieve a better balance of inputs and outputs, thus improving inflation figures.

Below is a series of charts procured by S&P Global from December's manufacturing PMI surveys that further highlight the state of the global supply chain...

The global manufacturing PMI Output Index, which serves as a reliable indicator of future global output, showed a fifth straight contraction in factory production in December...

The five straight months of contraction marks the first time that output has remained in a decline since 2009 – excluding the initial pandemic lockdowns.

The result of falling global demand resulted in a fast decline in new orders...

But maybe more importantly to note is the spread between new orders and output drastically changed over the past two years. In 2021, when demand was high due to additional stimulus spending, production was severely constrained as manufacturers struggled to keep up.

But over the past six months, excess production has surged. This is due to the lag effect of previous orders in 2021 finally being fulfilled in late 2022, while demand vanished over that same time. Moreover, we've now reached the longest stretch of surplus production compared with demand than at any time since 2009...

The extra inventory and low global demand sent prices plummeting in 2022. The global aggregate is approaching pre-pandemic levels of manufacturing output prices...

But as we've seen, all the excess inventory that sent output prices lower has disincentivized future orders.

Let's consider it another way. A decrease in demand and falling output prices have sent raw material inventory levels lower as we entered 2023 as manufacturers remained inactive in purchases because they do not want to be stuck hanging onto excess inventory...

This has weighed on manufacturing inflation, which should soon enough reflect in an easing of consumer inflation as the cost of purchased inventory is driven lower.

Shifting gears slightly, let's talk a little about the "China Effect."

While China has recently taken a 180-degree change in its COVID-19 policy, the manufacturing effects of its tight lockdowns in 2022 have already become entrenched in the global outlook. Combined with the geopolitical tensions surrounding the U.S. and Taiwan, major tech companies such as Apple (APPL) have shifted production out of China and moved to other Asian countries such as Vietnam and India.

The following chart shows how the only global region to produce a positive reading (above 50) for manufacturing output is Asia, excluding Japan and China...

However, with China lifting COVID-19 restrictions and the government signaling that it's fully committed to supporting economic growth in 2023, future expectations have been buoyed...

Now look at the global aggregate...

In short, 2023 is fraught with a tough environment for manufacturing output. It's quite possible that we've encountered the worst, but it may still take much of the year for manufacturing production and global demand to recover.

As prices continue to ease, global demand should inch its way back to pre-pandemic levels. While a global economic downturn this year is likely, easing pricing pressures is the first domino to fall on the way back for the global economy to recover.

Once demand begins to rebound, global production will start to ramp up again. This will serve as a catalyst for economic growth and eventually lift major economies back into a period of sustained growth... even if below long-term averages.