Is the glass half-full or half-empty for global manufacturers?

Slowing global growth has raised concerns lately. Both the Federal Reserve and the European Central Bank have taken proposed interest rate increases for 2019 off the table at recent meetings, indicating a reassessment of global growth prospects.

China’s economy has slowed under the weight of U.S. tariffs and regulatory attempts to tighten up on possible bubbles in lending and housing markets.

Newly-released surveys of purchasing manager sentiment in the U.S. and China showed improvement, offering hope that the recent softness was temporary and not the beginning of a sustained downturn.

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However, Germany, the European Union’s largest economy, offered new data that was just as bad as before. Whither manufacturing then?

The U.S. outlook seems the strongest. The Purchasing Managers’ Index, compiled by the Institute of Supply Management, is constructed so that a reading above 50 indicates expansion.

After hitting a buoyant level of 60.8 last August, the PMI skittered to 54.3 in December, leading to worries that strong manufacturing growth might be coming to an end. However, the index ticked up to 55.3 in March, which is quite a healthy reading.

The ISM report reveals a great deal of detail about both the current state and future prospects of U.S. manufacturing. Encouragingly, the New Orders Index surged to 57.4 in March, suggesting that manufacturers will have plenty of work to do in the coming months.

Customers’ inventories remain quite low, another good sign for the future. When the customers lack inventory, the manufacturers can count on demand.

The biggest sign of softness in the ISM report was the continued marginal performance of export demand. The Export Order index slipped to 51.7, just a bit above the break-even of 50.

Which brings us to the more worrisome side of these reports: Is the global economy slowing down? The European Union, taken together, is the largest market for U.S. exporters. The ECB’s latest moves are just one indication that the EU economy is slowing.

Germany, with the strongest manufacturing sector in Europe, announced a PMI of just 44.1 in March, even weaker than in February. German industrial output has been slowed by the adaptation to strict new environmental standards for auto production, with the effects percolating down to the extensive network of small and medium suppliers throughout the country.

Additionally, German manufacturers rely significantly on exports to China. They seem to be suffering significant collateral damage from the U.S.-China trade war. Furthermore, the threat of U.S. tariffs on European cars hangs like a dark cloud over the near future.

What about China itself? The optimistic PMI number for March would seem to be reassuring. However, experienced observers know better than to focus too much on a single month’s numbers.

China has been trying to rebalance its economy toward domestic consumption and away from a central focus on exports for some time now. It has also been struggling to keep a wild housing bubble and vast, rapidly-growing and poorly regulated financial system from melting down the whole economy.

The Chinese financial system includes a highly regulated but highly inefficient state sector and a massive, opaque shadow sector that is poorly regulated, hard to measure and monitor and closely connected in many cases to the state sector.

Corruption, government dictation to the state sector and speculative behavior all contribute to the cocktail of financial sector risk. Add stinging U.S. tariffs to the mix and the potential for calamity is daunting.

All of this suggests that China has plenty of motivation to reach some sort of deal with the U.S. this month to dampen trade tensions. But the Chinese leadership certainly has a long-term perspective; their economic development goals are ambitious and will not be easily abandoned.

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The leadership is well aware of its own ability to promise and then find clever ways to not deliver. While China certainly wants a deal that would diffuse the situation, it faces important economic and political pressures against accepting a deal that it deems not in its interests.

In short, although some of the new data suggests a springtime warming of manufacturing outlooks, the weather report is far from unthreatening. The manufacturing sectors of the U.S., EU and China are deeply interconnected.

Should economic conditions in the EU deteriorate further, the outlook for the others will weaken. Should trade tensions remain high or escalate, all will feel the consequences. Spring is here, but it may be followed by an overly hot summer.

Evan Kraft is the economist in residence for the Economics Department at American University. He served as director of the Research Department and adviser to the governor of the Croatian National Bank.