Global Manufacturing Recession Weighs On US Economy (#GotBitcoin?)
Companies like Alphabet and Twitter are beating expectations, but investors are pessimistic about the rest of the year. Global Manufacturing Recession Weighs On US Economy (#GotBitcoin?)
Corporate profits are proving to be more resilient than expected in the second quarter, nudging the stock market higher this month and distracting from anxieties about trade and economic growth.
Of the 221 S&P 500 companies that have reported earnings through Friday, 170 have surprised investors with better-than-expected results, according to FactSet. Technology giants Alphabet Inc. and Twitter Inc. both topped expectations, sending shares up 9.6% and 8.9%, respectively, on Friday. Coca-Cola Co. and United Parcel Services Inc. also jumped after reporting results last week.
Average earnings among S&P 500 companies that have reported are up 0.7% from a year earlier, according to FactSet. That has helped improve analysts’ forecasts for earnings to a 2.6% contraction for the quarter, better than the more than 3% pullback they had been predicting last week.
“The notion of a widespread economic weakness seemed plausible just a few weeks ago,” said Ed Keon, chief investment strategist at QMA LLC. “But in the last week or so you got a pretty good picture of the earnings season, suggesting those fears are overblown. It’s a hopeful sign.”
Earnings reports surprising to the upside are fairly common because analysts tend to be conservative with their estimates. Still, money managers say the latest round of results quelled some of their concerns that corporate profits were rapidly shrinking amid a faltering U.S. economy. More than 80 companies had warned ahead of the reporting season that earnings could be weaker than expected, helping to temper expectations, analysts said.
The S&P 500 has risen 2.9% so far in July, extending its gain this year to 21%, largely driven by the expectation of an interest-rate cut from the Federal Reserve. The stock market’s two best months, January and June, coincided with some of the strongest signals from Chairman Jerome Powell that the central bank will cut interest rates this year. Data from CME Group showed investors are betting on a 100% probability that the Fed will cut rates at its meeting this week.
Still, earnings gains in the latest quarter have done little to lift investors’ enthusiasm about where the stock market goes from here. And for manufacturers like Caterpillar Inc., import tariffs and trade tensions continue to weigh on outlooks. S&P 500 earnings are expected to rise just 1.7% over the full year, compared with the more than 3% analysts had penciled in last month.
The muted earnings outlook for the remainder of the year has contributed to a rise in pessimism among investors, analysts say. The share of individuals who say they expect U.S. stocks to fall or stay flat over the next six months has risen above those who are more bullish on equities, according to the American Association of Individual Investors’ latest survey.
“The ‘Powell put’ is driving the market higher, but the problem in the economy isn’t that rates are too high,” said Liz Ann Sonders, chief investment strategist at Charles Schwab Corp. “What ails us is a global manufacturing recession and business confidence being severely dented by a trade war.”
Industrial manufacturers are on pace to notch the second-biggest contraction in quarterly profits after materials stocks, with earnings projected to fall more than 12% from a year earlier, compared with expectations of a less than 2% pullback earlier this month, according to FactSet.
Caterpillar was a major contributor to that shift after the maker of bulldozers and excavators missed analysts’ earnings estimates because of slowing machine sales in Asia and higher costs from U.S. tariffs on Chinese imports. Shares of Caterpillar fell more than 2% last week.
Meanwhile, technology and communication companies reporting so far have mostly surprised investors to the upside, sending shares of both sectors up more than 5% each this month. Excluding a record-setting fine, Facebook topped analysts’ expectations for earnings and revenue, as did Google parent Alphabet.
But those latest gains have pushed stocks toward their richest valuations of the year, alarming some investors who fear the market doesn’t have much juice left to climb higher in 2019 after the S&P 500 posted its best first half of a year since 1997.
As of Friday, the S&P 500 traded at 17 times its earnings over the next 12 months, its highest level since late September, just before the stock market’s fourth-quarter selloff. That is above the 10-year average of nearly 15 times, according to FactSet, but well below the valuations of the dot-com era.
Alan Adelman, a senior fund manager at Frost Investment Advisors LLC, says current valuations include interest rates coming down and expectations of a trade resolution between the U.S. and China. If either of those don’t pan out, stock prices will need to be readjusted, he said. There is also some pricing in of a fourth-quarter bounceback in corporate profits, with earnings projected to climb 4.8% from a year earlier after declining nearly 2% in the third quarter, according to FactSet.
“We’re in the late stages of an economic expansion. Things can only go on for so long,” said Mr. Adelman, who has been focusing on investing in high-quality stocks that have relatively stable earnings and offer hefty dividends that exceed U.S. Treasury yields. “We have to be realistic. A lot of the positive news in the market is already baked in.”
Daimler (Mercedes-Benz) Looks To Cut Thousands of Jobs
All major German auto makers and their suppliers are now shedding staff in the face of dwindling demand.
Daimler AG aims to slash thousands of jobs over the next three years and cut labor costs by $1.5 billion, the latest round of cost cuts in a sector squeezed between huge investment in new technologies and falling demand for cars.
The announcement Friday by the maker of Mercedes-Benz luxury cars caps weeks of negotiations with labor representatives. All major German auto makers and their suppliers are now shedding staff in the face of dwindling demand as economies slow in China, the U.S. and Europe after years of robust growth.
Daimler, BMW AG , Audi AG , Volkswagen AG and big suppliers such as Continental AG have announced tens of thousands of job cuts in recent months. Continental is closing several plants, including its factory in Newport News, VA.
The companies have blamed the slowing global economy, consumer angst over Brexit and the U.S.-China trade wars for their woes. But they primarily point to an expensive shift from internal combustion engines to electric cars as manufacturers come under increasing pressure to curb greenhouse-gas emissions.
Earlier this month, Daimler said it planned to cut 10% of its global management ranks, affecting more than 1,000 jobs. Daimler wouldn’t put a number on the more far-reaching job cuts to its global workforce, which stood at 298,683 employees at the end of 2018.
Under the plan, Daimler said it would try to avoid any forced layoffs of full-time staff. Instead, the company will trim the ranks of temporary workers and not replace workers who retire, taking advantage of the large number of baby boomers reaching retirement age. The company also said it planned to offer voluntary severance packages and be more restrictive in awarding 40-hour contracts to permanent employees.
“With the key points we now agreed with the works council to streamline the company, we can achieve these goals by the end of 2022. We will make the measures as socially responsible as possible,” said Wilfried Porth, Daimler’s board member in charge of human resources.
Under German labor laws, worker representatives have considerable influence over decisions that directly affect the staff. But many of the decisions that Daimler could take to reduce labor costs might not require labor approval.
The works council, which represents the workforce in most matters except wages, has agreed to the broad outline of the restructuring plan but hasn’t committed to any specific number of job cuts, a spokesperson said.
Michael Brecht, the head of Daimler’s works council, said management needed to come up with a clearer plan for mastering the shift to electric.
“The workforce needs a clear and comprehensible strategy for going forward,” said Mr. Brecht. “A reduction of capacities must not be borne on the shoulders of the workforce.”
Surprise Exception to the Global Manufacturing Slowdown: Greece
Contrasting performance of Greece and Germany shows global integration is a two-edged sword.
Just a few years ago, Greece stood out from the rest of the developed world for its devastated economy. Its unemployment rate was 25% and its high debt levels had brought on default and crisis.
Today, it stands out for a more upbeat reason. At a time when factories around the world have slumped, Greece has the world’s strongest manufacturing sector, based on indexes of manufacturing activity.
Greece offers a lesson in how a country’s economic makeup can be a curse at certain times but a blessing at others.
Greece is reporting the highest manufacturing performance of all countries tracked by data firm IHS Markit. Toggle the chart below to switch between the ranks and nominal values for each country. Values higher than 50 indicate expansion, while values lower than 50 indicate contraction.
“The negative side of the coin is that we are not as open as other economies,” said Panos Tsakloglou, an economics professor at the Athens University of Economics and Business. “The positive flip side is if there is a slowdown in the world economy, the impact is not as great in Greece.”
Greece’s manufacturing sector is relatively small and concentrated in industries such as food and drink, which have largely been spared the global manufacturing slowdown. Contrast that with Germany, which two years ago had the strongest manufacturing sector, and today one of the weakest.
In November, Greece’s manufacturing purchasing managers’ index (PMI) logged in at 54.1, its 30th month above 50, which indicates growth. The PMI is based on a regular survey of purchasing managers by IHS Markit, a firm specializing in financial and economic data and analysis. Readings below 50 signal contraction. The Eurozone PMI was below 50 for the 10th straight month in November, reflecting weakness in Germany, Italy and Spain. Of the 30 countries tracked by IHS Markit, 19 were in contraction territory in November.
Greece’s manufacturing is domestically focused, meaning goods like machinery and metals are more likely to be sold at home than is the case in other countries. The country is less integrated into global supply chains, an advantage when trade tensions are crimping growth in other major exporters. Those trade tensions began to ease this month, but the pushback against globalization will likely continue.
The automobile industry offers a window into one of the downsides of globalization. A German-branded SUV, for example, often involves assembly in the U.S. and sales in countries like China. This means Germany has been in deeper trouble than Greece as world demand for automobiles weakens.
In Germany, about 19% of manufacturing output was in motor vehicles, trailers and semitrailers as of 2017, according to the United Nations Industrial Development Organization. By comparison, in Greece the share was just about a quarter of a percent.
In Italy, where the share is somewhere in between at about 5%, manufacturing activity has also slowed, though not as much as in Germany.
“In Greece, we have a more stable path…at the cost of not more extraordinary performance,” said Nikos Magginas, chief economist at the National Bank of Greece.
International organizations expect Greece to grow 1.8% in 2019 and over 2% in 2020, a relatively solid performance for Europe but far from the pace needed to soon recover the losses endured during the government-debt crisis.
Greece’s bailout effectively ended last year when it last borrowed from international organizations, though it is still required to run budget surpluses to help pay back these bailout loans. Greece is on track to exceed this year’s target, according to an EU report.
Manufacturing accounts for only about 10% of Greek economic output, similar to the U.S. and France. These more insular, services-oriented economies have better withstood the trade disruptions and uncertainty roiling export-dependent economies: In both the U.S. and France the PMI is above 50.
In some ways, Greece is a special case. After the country fell into one of the deepest depressions of modern times starting in 2009, its manufacturing index declined nearly each month for years. It hit rock bottom in 2015 at 30.2 when the Greek government closed down banks and imposed capital controls as the risk of a Greek exit from the eurozone escalated. Meanwhile, factories in other economies continued to hum. The lack of spillover from the Greek crisis to its neighbors underscored the absence of ties between them.
It wasn’t until 2017 that Greek manufacturing activity began to grow again, part of a broader pickup in the economy and business optimism.
Greek exports are also rising because they are comprised of more basic goods such as pharmaceuticals, food and oil-refining products that are less sensitive to fluctuations in global growth, Mr. Magginas said. Goods exports climbed to a record 19% of gross domestic product in the third quarter, even though important export markets like Turkey and Italy were weak, according to the National Bank of Greece. Service exports, a category that includes tourism and shipping, rose about 14.5% in the third quarter from a year earlier. That improvement in exports is essential to help Greece meet its fiscal targets.
Moreover, economists say Greece is making progress on long-term challenges to manufacturing, such as regulatory barriers and restrictive taxes. The corporate tax rate is expected to be cut to 24% in 2020 from 28%, and there are signs foreign investment is picking up: Chinese shipping company Cosco Group plans to invest around $1 billion in Greece’s Port of Piraeus.
But Greece has a long way to go before fully recovering from a decade of economic crisis. “We have quite a lot of bureaucracy, quite a lot of red tape that we have to get rid of,” Mr. Tsakloglou said.
German Growth Falls To Six-Year Low, Hit By Manufacturing Recession
International trade disputes and China’s slowdown weigh on Germany’s flagship auto industry.
Germany’s economic growth slumped to a six-year low in 2019 as the export powerhouse faced challenges in its flagship car industry, persistently slowing Chinese growth and global trade conflicts, a slowdown that weighs on Europe’s outlook.
Germany, Europe’s largest economy, is the first major country to report full-year growth figures for 2019 after the World Bank last week estimated that the global economy expanded by just 2.4% last year, the weakest rate since the global financial crisis. The bank also lowered its global growth forecast, pointing to a sluggish recovery in trade and investment.
With gross domestic product growth of 0.6% last year, Germany’s economy expanded at its slowest rate since 2013—the height of the eurozone’s debt crisis—dragged down by a manufacturing contraction of 3.6%. Despite a resolution to Britain’s exit from the European Union and an initial U.S.-China trade deal signed on Wednesday, economists predict Germany’s economy will barely grow this year.
Risks in the short and medium term include rising U.S.-EU trade tensions, the absence of a pact on future EU-U.K. trade ties, China’s slowing economy and Berlin’s reluctance to consider greater spending for fear of debt.
Longer term, Germany’s car industry—central to a manufacturing sector that accounts for about a quarter of the economy—and the country’s sprawling capital goods sector are facing rapid technological change and rising competition. The country’s aging population and deteriorating infrastructure are other risks to growth.
“The next decade will be a decade of underperformance, and people may once again start talking about Germany as the sick man of Europe,” said Joerg Kraemer, chief economist at Commerzbank in Frankfurt.
Germany’s weakness is bad news for Europe, and not just because of its size, accounting for about a fifth of the EU’s total gross domestic product. German manufacturers are also tightly integrated in the continent, particularly Central and Eastern Europe, where German-owned plants and suppliers to German companies account for a large share of jobs.
The slump in Germany’s auto industry, for instance, has already affected neighboring countries that produce parts or finished vehicles for its leading brands, such as the Czech Republic and Slovakia. Figures released Wednesday by the European Union’s statistics agency showed that while German industrial output in November was 4% down on a year earlier, Czech output was down 3.1%, and Slovak output down 4.4%. By contrast, France, whose car industry operates independently of Germany’s, output rose 1.2%.
Germany is also the largest export market for Italy, the bloc’s weakest large member. In the first 10 months of last year, Italy’s exports to the country grew by just 0.2% compared to the same period a year earlier versus Italy’s 2.7% increase in total foreign sales of goods. Italy’s exports to France, its second largest foreign market, were up 2.2%.
Germany, among the most open economies in the West, remains highly dependent on trade after decades of wage moderation, rising taxation, government belt-tightening and corporate cash hoarding. Exports are worth around 47% of Germany’s GDP, roughly four times the share of the U.S., according to data from the World Bank.
For a decade, the nation’s engineering and auto firms have surfed a wave of Chinese demand. The flood of consumer goods that came out of China were largely made with German-built machines. China’s roads remain dominated by German cars to this day.
Unlike many Western economies that have large trade deficits with China, Germany’s trade with China is almost balanced. But China’s economy has softened and its companies increasingly compete in the same markets as German firms. Some economists fear Germany could become the conduit for the Chinese slowdown to infect Europe. German exports fell 2.3% on the year in November, hurt by a fall in exports to China.
“As German machine builders we feel that huge uncertainty exists in China,” Carl Martin Welcker, president of Germany’s Mechanical Engineering Industry Association, said in December.
With Chinese growth unlikely to return to earlier rates, Marco Wagner, an economist at Commerzbank, said growth in Germany “will remain close to zero for now.”
For now, German unemployment remains low despite edging up slightly at the end of last year. But many German companies have been laying off staff, raising concerns that the manufacturing slump could start to be felt in the labor market and affect private consumption in the course of the year.
Brose Group, an auto parts producer, said in October it would reduce its German workforce by around 2,000 by late 2022. It blamed the declining auto market, especially in China. Continental AG , a giant auto parts manufacturer, announced plant closures in Germany in November as part of a sweeping restructuring plan.
Germany’s Federal Labor Agency said this month that job vacancies were falling and more firms had reduced working hours to preserve jobs.
Germany’s car sector is one of the biggest question marks for the country’s economy. In 2019, German car production fell to its lowest level in almost a quarter of a century, according to the VDA auto lobby group, while the sector’s workforce has shrunk by 1.3% since the start of 2019, according to the Ifo economic think tank. Some 14% of auto companies say they have shortened working hours to avoid layoffs. Weakness in the sector likely trimmed German growth by 0.75 percentage points in 2019, according to Ifo.
While there are signs that demand is stabilizing, experts warn the sector is also facing structural challenges that aren’t going away and that it may already be past its zenith in terms of profits and jobs.
Manufacturers such as Volkswagen AG are making considerable investments in a large-scale transition to electric vehicles, but demand for the new technology remains tepid. Even if the gamble pays off, EVs carry lower margins and their manufacturing is less labor intensive than combustion-engine cars, which could have a further impact on jobs.
Germany’s economic slowdown, from 1.5% GDP growth in 2018, helped trigger an aggressive response in September from the European Central Bank, which cut interest rates and launched an open-ended bond-buying program to shore up growth. Other major central banks also loosened policy last year, including the Federal Reserve, as global trade growth fell to its lowest level since the 2008-09 financial crisis.
The U.S. Treasury Department this week flagged Germany’s economic imbalances. In its foreign-exchange report, which addresses the currency practices and macroeconomic policies of major U.S. trading partners, it urged Berlin to cut taxes and boost domestic investment and consumption.
There is little chance of this happening, at least in the short term. Germany’s government has so far rejected international pleas to prop up its economy through debt-financed spending, despite enjoying negative interest rates, meaning that investors pay it to lend it money.
The finance ministry this week reported a larger than expected budget surplus for last year—its sixth in a row. Together with national social security funds, the nation recorded a total budget surplus worth around 1.5% of GDP last year, said Joerg Kraemer, chief economist at Commerzbank.
German officials argue that the nation’s large welfare state means there’s no need to increase spending during a downturn. Politicians are also constrained by tough fiscal rules enshrined in the constitution that outlaw budget deficits over the economic cycle. Some German economists say it makes sense for an aging country like Germany to generate a surplus and that it will fade over time.
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