• Dr Akela

Why Did the US PMI Drop?

The manufacturing sector is taking a hit throughout the world. Its latest victim, the US, appeared impervious to potential side effects from the trade war it initiated, but the data tell a different story: the manufacturing PMI reading was at its lowest over the past decade, reaching levels which were unseen since the Great Recession.

The first victims of the trade war was the technology sector, which witnessed a sharp drop as growth in China stalled. This can be easily justified: durable goods such as cars and computers have a higher sensitivity to changes in income than necessary goods such as food and drinks. As Chinese consumers become frugal and decide to spend less, fearing a future decline in income, countries like South Korea and Singapore start witnessing sharp drops in exports. In both countries, the electronics sector accounts for a huge share of their exports – in Singapore, 36% of total exports are integrated circuits.

China on the other hand, imports integrated circuits heavily: 13.5% of its total exports, or $207 billion were spent in 2017 – roughly the total exports of both South Korea and Singapore. While the two countries do not solely export to China, it gives a good idea of what happens when China decreases its imports. As the data show, Chinese imports have declined 4.9% until September 2019, causing a sharp deterioration in the region.

The impact from demise of China’s growth is not limited to Asia though: Germany has also seen its exports drop, with China accounting for $95 billion of exports in 2017, with Australia and New Zealand being more able to mitigate the impact due to their exports of non-electronic goods (wood, dairy, metals).

Now, it’s time that the feedback loop turns to the US: as global demand for purchasing high-priced electronics drops and, given that the largest technology companies are based in the US, it is time they start experiencing the side effects of the trade war. As foreign demand drops, producers start reducing orders for domestically produced goods, even as they continue to maintain or even increase jobs.

Where does this lead? Answers to come in the next Wolf article - stay tuned.