DEMAND FOR RAW MATERIALS AND SEMI-MANUFACTURED GOODS WEAKENED IN JULY, FALLING AT FASTEST RATE THIS YEAR, SIGNALLING SLOWING ECONOMIC GROWTH: GEP GLOBAL SUPPLY CHAIN VOLATILITY INDEX

Rhea-AI Summary

The GEP Global Supply Chain Volatility Index for July 2024 indicates a significant weakening in demand for raw materials and semi-manufactured goods, signaling slowing economic growth. Key findings include:

- Global factory purchasing activity fell at the fastest rate since late 2023
- Asian factory demand weakened, with Chinese purchasing decreasing for the first time in nine months
- North American suppliers reported underutilized capacity, with Mexican manufacturers seeing lower input demand
- European manufacturing recession persisted, especially in Germany
- Global transportation costs reached a 21-month high, driven by Asia

The index suggests increasing spare capacity in worldwide supply chains, potentially supporting calls for the Federal Reserve to lower interest rates soon.

Positive

• Supply chains are operating efficiently with no signs of stockpiling, shortages, or price pressures
• The inventory cycle has stabilized, trending in line with long-term average
• Reports of item shortages fell to their lowest level since January
• Labor supply is not an inhibiting factor for global manufacturers

Negative

• Global factory purchasing activity declined at the fastest rate since late 2023
• Asian factory demand weakened to its lowest level since December 2023
• Chinese factories decreased purchasing activity for the first time in nine months
• North American suppliers reported underutilized capacity
• European manufacturing sector continues to face recession conditions
• Global transportation costs reached a 21-month high

Insights

Economic Analyst

The GEP Global Supply Chain Volatility Index for July reveals a significant slowdown in global manufacturing activity, with implications for monetary policy and economic growth. The index fell to a four-month low, indicating underutilized capacity in global supply chains for the first time since April.

Key points:

• Worldwide demand for raw materials and semi-manufactured goods weakened, falling at the fastest rate this year.
• Asian factory demand, particularly in China and Japan, contracted to its weakest level since December 2023.
• Europe's manufacturing sector continues to struggle, especially in Germany.
• North American suppliers reported slightly underutilized capacity, with Mexico showing a decline in input demand for the first time since October 2023.

This data suggests a cooling global economy, which could pressure central banks, particularly the Federal Reserve, to consider lowering interest rates sooner than anticipated. However, the absence of stockpiling, shortages, or price pressures indicates that supply chains are operating efficiently despite the slowdown.

Supply Chain Expert

The July data from the GEP Global Supply Chain Volatility Index highlights a shift in global supply chain dynamics. The index's fall to a four-month low signals a reduction in supply chain stress, but also points to potential economic headwinds.

Key observations:

• Inventory levels have stabilized, with safety stockpiling below typical levels.
• Material shortages have decreased to their lowest level since January.
• Labor supply is not currently a constraining factor for global manufacturers.
• Global transportation costs are at a 21-month high, primarily driven by Asia.

These trends suggest a rebalancing of supply and demand in global markets. While the easing of supply chain pressures is positive for operational efficiency, it also reflects weakening demand, which could be concerning for future economic growth. Companies may need to reassess their inventory strategies and production plans in light of this shifting landscape.

Global Market Strategist

The latest GEP Global Supply Chain Volatility Index presents a mixed picture for investors. While easing supply chain pressures might normally be seen as positive, the context of weakening demand signals potential economic challenges ahead.

Investment implications:

• Manufacturing sector stocks, particularly in Europe and Asia, may face headwinds due to declining demand.
• Companies with efficient inventory management systems could outperform as the inventory cycle stabilizes.
• Transportation and logistics firms might see pressure on margins despite higher costs, due to lower overall demand.
• Potential for earlier-than-expected interest rate cuts could benefit rate-sensitive sectors like real estate and utilities.

Investors should monitor central bank responses to this data, as it could influence monetary policy decisions. The divergence between regions (e.g., Europe's persistent weakness vs. North America's milder slowdown) suggests the importance of a geographically diversified portfolio in navigating the current economic landscape.

• Worldwide supply chain spare capacity rises, adding to the calls for the Federal Reserve to lower interest rates soon.
• Asian factory demand at its weakest since December 2023, partly because of a notable decrease in purchasing by Chinese factories.
• Suppliers to North America report underutilized capacity, with Mexican manufacturers reporting lower input demand for the first time since October 2023.
• European market continues to struggle, with region's manufacturing recession persisting.

CLARK, N.J., Aug. 12, 2024 /PRNewswire/ -- In July, the GEP Global Supply Chain Volatility Index — a leading indicator tracking demand conditions, shortages, transportation costs, inventories and backlogs based on a monthly survey of 27,000 businesses — signaled underutilized capacity at global suppliers for the first time since April, falling to a four-month low.

The greatest level of slack in supply chains was in Europe, which continues to grapple with recession conditions in its manufacturing sector, especially in Germany. Asia growth also cooled as factory demand in the region contracted to its weakest since December 2023. Underlying data revealed a decrease in purchasing activity by Chinese factories — the first time this has occurred in nine months. Japan's manufacturing sector was also a source of weakness.

Suppliers to North American companies reported slightly underutilized capacity during July, as was the case in June. Slowing purchasing activity was seen across all three countries within the region, with Canada reporting the steepest contraction. Notably, Mexican factories, which have been a driver of growth in the region this year, reported lower input demand for the first time since October 2023.

"In July, purchasing activity by global manufacturers declined, indicating that economic growth is slowing, adding to the calls for the Federal Reserve to lower interest rates sooner rather than later," explained Mike Jette, vice president, consulting, GEP. "This is not alarming data. The world's supply chains continue to operate efficiently, with no sign of stockpiling, shortages, or price pressures. But to head off any material slowdown in the second half of the year, manufacturers do need demand to increase."

Interpreting the data:
Index > 0, supply chain capacity is being stretched. The further above 0, the more stretched supply chains are.
Index < 0, supply chain capacity is being underutilized. The further below 0, the more underutilized supply chains are.

JULY 2024 KEY FINDINGS

• DEMAND: Having recovered in the first half of the year, global factory purchasing activity fell by the greatest margin since the end of 2023 in July, indicating renewed weakness in the world economy. Central to this decline was a fresh slowdown in Asia, driven by China and Japan. Europe's manufacturing recession persisted, especially in Germany, where factory purchasing contracted sharply.
  
  
• INVENTORIES: The inventory cycle has stabilized. While reports from global businesses of safety stockpiling due to price or supply concerns were below typical levels, the underlying indicator has generally trended in line with its long-term average so far this year.
  
  
• MATERIAL SHORTAGES: Reports of item shortages fell slightly in July, down to their lowest level since January, signaling high stock levels at vendors of commodities and critical raw materials.
  
  
• LABOR SHORTAGES: The supply of labor is not an inhibiting factor for global manufacturers, as reports of backlogs due to insufficient staffing capacity are at typical levels.
  
  
• TRANSPORTATION: Although supply chain activity dipped in July, global transportation costs are at the highest in 21 months, largely driven by Asia.

REGIONAL SUPPLY CHAIN VOLATILITY

• NORTH AMERICA: Index unchanged at -0.11, indicating slightly underutilized capacity across the region's suppliers. Manufacturers in the U.S., Mexico and Canada all reported a softening of demand in July.
  
  
• EUROPE: Index fell sharply to a three-month low of -0.49, down from -0.13. Europe's manufacturing sector recession is persisting, with major economies, such as Germany, at the heart of the decline.
  
  
• U.K.: Index dropped to 0.11, from 0.49 in June, but still signaling capacity pressures at the U.K.'s suppliers.
  
  
• ASIA: Index slipped from June's 16-month high of 0.35 to 0.07, its lowest since April. Demand for inputs at Asian factories was at its weakest this year, principally because of a softening in China and Japan.

For more information, visit www.gep.com/volatility.

Full historical data dating back to January 2005 is available for subscription. Please contact economics@spglobal.com.

The next release of the GEP Global Supply Chain Volatility Index will be 8 a.m. ET, September 11, 2024.

About the GEP Global Supply Chain Volatility Index

The GEP Global Supply Chain Volatility Index is produced by S&P Global and GEP. It is derived from S&P Global's PMI^® surveys, sent to companies in over 40 countries, totaling around 27,000 companies. The headline figure is a weighted sum of six sub-indices derived from PMI data, PMI Comments Trackers and PMI Commodity Price & Supply Indicators compiled by S&P Global. For more information about the methodology, click here.

About GEP

GEP^® delivers AI-powered procurement and supply chain solutions that help global enterprises become more agile and resilient, operate more efficiently and effectively, gain competitive advantage, boost profitability and increase shareholder value. Fresh thinking, innovative products, unrivaled domain expertise, smart, passionate people — this is how GEP SOFTWARE™, GEP STRATEGY™ and GEP MANAGED SERVICES™ together deliver procurement and supply chain solutions of unprecedented scale, power and effectiveness. Our customers are the world's best companies, including more than 550 Fortune 500 and Global 2000 industry leaders who rely on GEP to meet ambitious strategic, financial and operational goals. A leader in multiple Gartner Magic Quadrants, GEP's cloud-native software and digital business platforms consistently win awards and recognition from industry analysts, research firms and media outlets, including Gartner, Forrester, IDC, ISG, and Spend Matters. GEP is also regularly ranked a top procurement and supply chain consulting and strategy firm, and a leading managed services provider by ALM, Everest Group, NelsonHall, IDC, ISG and HFS, among others. Headquartered in Clark, New Jersey, GEP has offices and operations centers across Europe, Asia, Africa and the Americas. To learn more, visit www.gep.com.

About S&P Global

S&P Global (NYSE: SPGI) S&P Global provides essential intelligence. We enable governments, businesses and individuals with the right data, expertise and connected technology so that they can make decisions with conviction. From helping our customers assess new investments to guiding them through ESG and energy transition across supply chains, we unlock new opportunities, solve challenges and accelerate progress for the world. We are widely sought after by many of the world's leading organizations to provide credit ratings, benchmarks, analytics and workflow solutions in the global capital, commodity and automotive markets. With every one of our offerings, we help the world's leading organizations plan for tomorrow, today.

Media Contacts
Derek Creevey	Joe Hayes	Email: joe.hayes@spglobal.com
GEP	Principal Economist
Phone: +1 732-382-6565	S&P Global Market Intelligence
Email: derek.creevey@gep.com	Phone: +44-1344-328-099

 

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FAQ

What does the GEP Global Supply Chain Volatility Index for July 2024 indicate?

The index indicates a significant weakening in demand for raw materials and semi-manufactured goods, signaling slowing economic growth. It fell to a four-month low, showing underutilized capacity at global suppliers for the first time since April.

How did Asian factory demand perform in July 2024 according to the GEP index?

Asian factory demand contracted to its weakest level since December 2023. Notably, Chinese factories decreased purchasing activity for the first time in nine months, and Japan's manufacturing sector also showed weakness.

What was the state of North American supply chains in July 2024?

Suppliers to North American companies reported slightly underutilized capacity. Slowing purchasing activity was observed across the U.S., Canada, and Mexico, with Canadian manufacturers reporting the steepest contraction.

How did the European manufacturing sector perform in July 2024 according to the GEP index?

The European manufacturing sector continued to struggle with recession conditions, especially in Germany. The region showed the greatest level of slack in supply chains, with the index falling sharply to a three-month low of -0.49.

What were the global transportation costs like in July 2024?

Despite a dip in supply chain activity, global transportation costs reached their highest level in 21 months, largely driven by increases in Asia.