Global manufacturing is on a downtrend, but the services sector remains relatively resilient amid cooling economic growth.

Manufacturing is highly integrated globally. It has been the part of the world economy that has been the most influenced by factors such as protectionist tariffs, China's economy, and political developments. In the United States, auto sales appear to have peaked, and new orders for U.S.-made capital goods remain sluggish. The auto industry had a good long run, but the expansion may be ending. The increase in U.S. interest rates last year is one key reason. There is also a problem with aircraft orders in the United States because of Boeing's troubled 737-Max planes. And capital spending has been sluggish.

In addition, vehicle sales globally are facing some headwinds. The European markets are a little weak, and China's demand for autos has fallen. To make matters worse, the United States is mulling imposing tariffs on auto imports from Europe. The Trump administration's trade war has produced a range of effects on global manufacturing. Protectionist tariffs have raised the costs for many manufacturers. The 2018 tariffs, mainly on imports from China, prompted companies to increase their imports ahead of the tariffs, creating an inventory overhang. Other factors such as the slower pace of innovation in smartphones may have also affected manufacturing.

Globally, auto sales face headwinds: European markets have been a little weak, and China's demand for autos has fallen.

Despite the weakness, there are a few tentative signs that manufacturing PMIs are stabilizing. China's PMI rose in March. Also, East Asian economies that are tightly linked to the global cycle showed small improvements in the sector. The manufacturing sector in the United States is doing a little better than that of many other countries. We believe the global manufacturing sector is likely to improve, but the recovery will be modest and halting. The risks are to the downside.

Gap between services and manufacturing

On the other hand, the services sector in many parts of the world remains quite strong. "Service workers" is a very broad category that includes retail clerks, truck drivers, architects, bankers, doctors, and others. There is a gap between manufacturing and non-manufacturing purchasing managers indexes (PMIs) in the United States, the eurozone, and many other places. According to JPMorgan's global PMI data, the gap between manufacturing and services is about as large as it gets.

Global manufacturing shows downtrend

For now, the labor markets are in good shape in the United States, the eurozone, and Japan due to the resilience in the services sector. Growth in this sector has supported household income and consumer spending. While the gap between the manufacturing and services sectors can continue, we believe it will eventually be resolved. Either manufacturing will improve or prolonged weakness in manufacturing will weaken the labor markets and drag down the services sector.

The resilience in the services sector is keeping labor markets in good shape in the United States, the eurozone, and Japan.

A delicate balance

All these issues together make the economic data flow hard to read. There is too much going on, and that is distorting the data flow. Our central scenario remains the same. The U.S. economy is slowing, but we don't expect a recession in 2019. The eurozone will limp along. China's growth will pick up. A truce will be reached between the United States and China on trade. Global growth will remain strong enough to avoid recession, but weak enough to keep central banks on hold in the absence of inflation.

Risks include economic risks, the valuations in equity markets, and the almost-inverted yield curve. The Fed has signaled it is on hold. Central bank officials have started to discuss the conditions under which the Fed may lower interest rates. While it is possible the Fed will cut rates by the end of this year, this is not our central case. Things are certainly delicately balanced now.


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The global economy is showing a few tentative signs of improvement, but risks remain.