Weak Manufacturing PMI Shows US Isn’t Immune to Trade Woes

Today, the Institute for Supply Management released its US Manufacturing PMI (purchasing managers’ index) data for July. US manufacturing activity expanded in July, but the growth rate was the weakest it’s been in the last three years. The manufacturing PMI came in at 51.2 in July, the lowest reading since August 2016. In June, the PMI came in at 51.7. July’s reading was lower than economists’ expectation of 52.0, according to the consensus compiled by Reuters.

US IHS Markit PMI

IHS Markit also released its US manufacturing PMI today. Its reading came in at 50.4, slightly better than the market’s expectation of 50.0. The reading, however, implied the slowest pace of expansion since September 2009. Chris Williamson, chief business economist at IHS Markit, said, “US manufacturing has entered into its sharpest downturn since 2009, suggesting the goods-producing sector is on course to act as a significant drag on the economy in the third quarter. The deterioration in the survey’s output index is indicative of manufacturing production declining at an annualised rate in excess of 3%.”

Slowing US business spending

Williamson also identified slowing domestic business spending and declining exports as the key drivers of the downturn. According to S&P Global, US corporate spending will likely slow to 3% after growing by 11% in 2018. On the one hand, the trade war has been affecting businesses due to higher input costs and slowing demand. On the other hand, due to the uncertainty about the business environment, investment decisions are being delayed.

Williamson added that employment is also falling as factories scale back on hiring amid growing uncertainty.

Trade war affects companies

The US-China trade war is affecting companies in both countries. In fact, US chip stocks are among those most affected by the trade war. Qualcomm (QCOM), Intel (INTC), NVIDIA (NVDA), Broadcom (AVGO), and Micron (MU) came under pressure after President Donald Trump announced a ban on Huawei. The companies have significant revenue exposure to China. Today, Qualcomm released its earnings results. It provided disappointing guidance, which was partly related to the trade tensions with China.

Among Chinese stocks, Alibaba (BABA) and JD.com (JD) are up 26.2% and 42.7%, respectively, so far this year. Baidu (BIDU) and NIO (NIO), on the other hand, are down 29.4% and 45.3%, respectively.

 The US versus China

However, the trade war seems to be affecting China more. The iShares FTSE/Xinhua China 25 Index (FXI) has risen 8.4% year-to-date. In contrast, the S&P 500 (SPY) is up 20.0%. Yesterday, China released its official manufacturing PMI data. It came in at 49.7, contracting for the third month in a row. The manufacturing PMIs from almost all over the world, including Europe and Japan, are showing deceleration.