August GEP: Manufacturing Faces Material Slowdown

Capacity among global suppliers is being underutilised for the first time since April. 

That's according to the latest GEP Global Volatility Index, a leading indicator tracking demand conditions, shortages, transportation costs, inventories and backlogs based on a monthly survey of 27,000 businesses.

However, GEP contends that alarm bells should not yet be ringing. 

Slow purchasing activity in North America

GEP's August index shows that, across the world, supply chains are facing local issues that are impacting manufacturing.

The greatest level of slack is happening in Europe as it continues to battle recession conditions in its manufacturing sector, especially in Germany.

Asia saw its own growth cool as factor demand in the region contracted to its weakest since December 2023. Underlying data has revealed a decrease in purchasing activity by Chinese factories – the first time in nine months this has happened. Japan’s manufacturing sector was also a source of weakness in the region. 

Suppliers to companies in North America reported a slightly underutilised capacity during July, repeating a trend seen in June. Slow purchasing activity was seen across the US, Canada and Mexico, 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.

Manufacturing: shortages, recovery & stabilisation 

LABOUR SHORTAGES: The supply of labour is not an inhibiting factor for global manufacturers, as reports of backlogs due to insufficient staffing capacity are at typical levels.

INPUT 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.

TRANSPORTATION: Although supply chain activity dipped in July, global transportation costs are at the highest in 21 months, largely driven by Asia. 

INVENTORIES: The inventory cycle has stabilised. 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, signalling high stock levels at vendors of commodities and critical raw materials.

How does the GEP Global Supply Chain Volatility Index function?

The GEP Global Supply Chain Volatility Index is a collaborative effort between S&P Global and GEP.

It draws from S&P Global's PMI surveys, which are distributed to 27,000 companies worldwide, a weighted aggregation of six sub-indices derived from PMI data, PMI Comments Trackers and PMI Commodity Price & Supply Indicators provided by S&P Global.

A positive value in the GEP Global Supply Chain Volatility Index indicates strained supply chain capacity, leading to increased volatility.

The higher the value, the greater the strain on capacity.

Conversely, a negative value suggests underutilised supply chain capacity, resulting in reduced volatility.

The lower the value, the greater the degree of underutilisation of capacity.

Regional variations in the GEP Global Supply Chain Volatility Index

NORTH AMERICA: Index unchanged at -0.11, indicating slightly underutilised 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. 
 
UK: Index dropped to 0.11, from 0.49 in June, but still signalling capacity pressures at the UK’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.

“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,” explain Mike Jette, Vice President, Consulting at 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.”

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