A shortage of parts made in Japan is temporarily disrupting global manufacturing, in general, and the auto industry, in particular. In the US, the purchasing managers index (PMI) for manufacturing declined from 60.4 during April to 53.5 in May. It was led by sharp drops in the New Orders Index (from 61.7 to 51.0) and in the Production Index (from 63.8 to 54.0). Interestingly, the Employment Index dropped by less (from 62.7 to 58.2), and it remained above 50. The Inventory Index dropped below 50 (from 53.6 to 48.7). That’s consistent with the view that manufacturers are drawing down their parts inventories while they wait for more supplies from Japan.
Not surprisingly given that Japan produces lots of key parts for auto companies around the world, the soft patch has gone global. The UK’s PMI fell from 54.4 in April to 52.1 last month, the lowest in 20 months. The PMI for the EU declined from 58.0 in April to a seven-month low of 54.7 in May. Germany’s PMI dropped below 60.0 for the first time in six months to 57.7. Please notice that there is no great tragedy in any of these PMI indicators. They all remain solidly above 50. Keep in mind that they are diffusion indexes. That means that at some point in an economic expansion business might be great, but no greater than the month before. When that happens, the index will tend to cycle back down towards 50.