Signs of Life in Global Manufacturing

The beleaguered manufacturing sector is showing signs of improvement.

December 23, 2019

This Macroeconomic Outlook report is excerpted from the Fourth Quarter 2019 Fixed-Income Outlook.

U.S. real gross domestic product (GDP) growth held roughly steady at 2.1 percent annualized in the third quarter versus 2.0 percent in the second quarter. The data showed a moderation in government spending and personal consumption expenditure growth, which came in at 3.1 percent annualized after an unsustainably strong 4.6 percent reading in the prior quarter. However, this was largely offset by a smaller drag from inventories and net exports.

Despite the pullback in consumer spending growth, the U.S. household sector has remained a bright spot as clouds have gathered over the global economy. The manufacturing sector has borne the brunt of the escalation in U.S.-China tariffs, while also contending with headwinds in the form of U.S. dollar appreciation and weakness in foreign demand. Beyond the U.S., the trade war and China’s ongoing financial deleveraging have detracted from global trade volumes, which are contracting on a year-over-year basis for the first time since 2009. The global trade recession has weighed on GDP growth in economies that are particularly trade- and investment-oriented. Real GDP growth in China slowed to 6.0 percent year over year in the third quarter, the slowest pace in several decades, while German GDP grew by just 0.3 percent annualized in the third quarter after contracting by 1.0 percent in the prior quarter.

Global Growth Has Slowed, With Trade Volumes Now Contracting

Percent Change Y/Y

The U.S.-China trade war has detracted from global trade volumes, which contracted on a year-over-year basis in the second quarter for the first time since 2009.

Global Growth Has Slowed, With Trade Volumes Now Contracting

Source: Guggenheim Investments, Haver Analytics, Federal Reserve Bank of Dallas, Netherlands Bureau for Economic Policy Analysis. Trade data as of 6.30.2019; GDP data as of 9.30.2019. Shaded areas represent recession.

The good news is that the manufacturing sector represents only 11.0 percent of U.S. GDP and 8.4 percent of nonfarm payrolls. We see encouraging signs of an upturn in goods production, which a tentative U.S.-China trade truce should support. Meanwhile, growth in the much larger services sector has moderated, with real personal spending on services having softened over the past year. Also noteworthy to us was the decline in the employment diffusion index of the IHS Markit purchasing managers index (PMI) for services, which fell to 47.5 in October before rebounding in November and December. Global PMIs also showed a sequential improvement in labor market conditions in November.

Global Labor Market Conditions Improved in November

JP Morgan Global PMIs: Employment Diffusion Indexes

Global PMIs show softening labor market conditions across services as well as manufacturing.

Global Labor Market Conditions Have Softened

Source: Guggenheim Investments, Haver Analytics, JP Morgan/IHS Markit. Data as of 11.30.2019. Note: Readings above 50 denote expansion.

Fiscal policy is estimated to have boosted U.S. real GDP growth by about 0.6 percentage point in 2019. This substantial fiscal support should fade in 2020, resulting in no contribution to growth (a -0.6 percentage point shift in the growth impulse). We expect the Federal Reserve (Fed) to remain on hold in the near term, with monetary policymakers having indicated that the bar is high for further rate changes. This message has since been reinforced by the Fed’s senior leadership, who have noted that “monetary policy is in a good place.” The recent rally in stocks and bear steepening of the yield curve suggests that markets agree.

—Brian Smedley, Head of Macroeconomic and Investment Research; Maria Giraldo, CFA, Managing Director; Matt Bush, CFA, CBE, Director

Important Notices and Disclosures

This article is distributed for informational purposes only and should not be considered as investing advice or a recommendation of any particular security, strategy or investment product. It contains opinions of the authors but not necessarily those of Guggenheim Partners or its subsidiaries. The authors’ opinions are subject to change without notice. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. Past performance is no guarantee of future results.

Investing involves risk. In general, the value of fixed-income securities fall when interest rates rise. High-yield securities present more liquidity and credit risk than investment grade bonds and may be subject to greater volatility. Asset-backed securities, including mortgage-backed securities, may have structures that make their reaction to interest rates and other factors difficult to predict, making their prices volatile and they are subject to liquidity risk. Investments in floating rate senior secured syndicated bank loans and other floating rate securities involve special types of risks, including credit risk, interest rate risk, liquidity risk and prepayment risk. Guggenheim Investments represents the following affiliated investment management businesses of Guggenheim Partners, LLC: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Funds Distributors, LLC, GS GAMMA Advisors, LLC, Guggenheim Partners Europe Limited, and Guggenheim Partners India Management.

©2019, Guggenheim Partners, LLC. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Guggenheim Partners, LLC.


Despite the Gray Mood, Skies Are Only Partly Cloudy - Featured Perspectives
May 24, 2022

Despite the Gray Mood, Skies Are Only Partly Cloudy

The outlook for credit amid rising inflation, monetary tightening, and war in Europe.

Fed Aggressiveness Following Delayed Liftoff Sets Up 2023 Collision - Featured Perspectives
May 18, 2022

Fed Aggressiveness Following Delayed Liftoff Sets Up 2023 Collision

The risks of tightening into a downturn.

For Lessons on Fighting Inflation, Skip Over Volcker to 1946 - Featured Perspectives
March 22, 2022

For Lessons on Fighting Inflation, Skip Over Volcker to 1946

Clues from history on how to successfully end the current surge in prices.


Market Outlook 

First Quarter 2022 Market Outlook

Maria Giraldo, CFA, Managing Director, Investment Research, and Evan Serdensky, Director, Portfolio Management, provide our macro and markets outlook.

Macro Markets Podcast 

Macro Markets Podcast Episode 13: The Fed, Credit Quality, and Bank Loans

U.S. Economist Matt Bush analyzes the latest Fed announcement and labor and inflation data, Investment Strategist Maria Giraldo discusses credit risk while the Fed tightens, and Managing Director Chris Keywork updates on the bank loan market.