What do the stats from ISM’s Report On Business reveal about the economy and how can they help you on the job?
The October Purchasing Managers’ Index (PMI®) registered 58.7 per cent in the U.S. It showed a decrease of 2.1 percentage points from the September ISM® Manufacturing ROB reading, yet the report stated that the economy has been growing for the past 14 consecutive months.
What do all these numbers mean and how can they help you in your job?
These reports have been correctly forecasting major turns in the business cycle for more than 70 years. Savvy purchasing executives have been using the keen insights provided to help with their strategic and tactical plans for just as long.
First things first, any PMI® above 50 indicates expansion in the ISM® report. So even if ‘the rate of up is down’, as our former chair used to joke, if the index is above 50 it signals a growing economy. If you are new to reading this report, start with the ‘Table At A Glance’ so you can familiarise yourself with the comparison of this month to last month for all 11 indicators.
Next, start listening in to the radio broadcasts each month following the report, on Manufacturing Talk Radio – not only will you get analysis of the latest numbers, there is also an archive of shows from which to put everything in context, and help you make the most of these reports.
ISM Report On Business
The foundation of the ISM® ROB and the primary reason for its credibility as an accurate indicator of the U.S. economy is the Business Survey Committee. The committee is composed of supply management professionals who are responsible for the purchases at their company.
Membership of the committee is based on the Census Bureaus’ North American Industry Classification System (NAICS) and diversified on each industry’s contribution to Gross Domestic Product (GDP).
Data is collected through a monthly survey, which asks how certain economic events have changed, if at all, in the current reporting month compared to the previous month. Committee members are only required to indicate for each of the activities has moved in one of three ways: has there been no change (same), or has there been a positive change in the economic directions (better, higher, and for Supplier Deliveries, slower) or a negative change in the economic direction (worse, lower, and for Supplier Deliveries, faster).
Members are encouraged to make additional comments about any of the activities that are affecting their purchasing operation or the outlook of their company. These comments provide valuable insight and depth to the reasons for the changes which might not otherwise be apparent form the statistics alone.
Are you interested in joining the panel of supply management professionals whose input informs the ISM® Manufacturing Report On Business®? It’s also a great way to learn what each index means!
To find out if you qualify and fill out an interest form, please click here.
Trump’s trade policies will greatly affect our global supply chains. How will increased protectionism and bilateral deals impact the procurement function?
Frantically attempting to understand the new modern world, commentators and experts are struggling to digest the political earthquakes of 2016. It remains wholly unclear what binds together the widespread nationalism, populism and division in countries around the world.
The threat to global supply chains
Trump has a clear dislike of international trade, preferring to shield the USA’s economy from competition. He has a disdain for businesses moving operations to other countries.
Whether or not organisations source much directly from non-domestic sources, they are dependent on global supply chains and networks. These networks are responsible for sourcing the goods and services to meet the needs of stakeholders. Threats to free trade pose challenges to procurement professionals and their ability to source goods and services efficiently and cost-effectively.
For many years, there has been a trend for opening up procurement markets. This trend has entailed removing tariffs on imports, opening up non-discriminatory bidding on public contracts to non-domestic businesses and harmonising regulatory regimes to make cross-border trade less bureaucratic and more efficient. This has allowed procurement teams to drive down costs and increase competition and product choice.
Trump’s abolition of free trade agreements
Since inauguration, Trump has honoured his commitments to abolish pending free trade agreements (FTAs) with the European Union and eleven Pacific Rim countries. Both contained provisions which would have opened up the procurement markets to non-discriminatory bidding for businesses across participating countries. This eases importing processes.
Trump also vowed to renegotiate the North American Free Trade Agreement (NAFTA) with Canada and Mexico, which has been critical in creating and sustaining supply chains in North America.
With this move away from free trade, what are the prospects for continued integration of procurement markets in the Trump era? There are two points to cover – new bilateral FTAs including the USA and the movement towards free trade driven by powers beyond the USA.
The prospect of new bilateral deals
Firstly, whilst Trump has expressed a strong distaste for multilateral FTAs such as TTIP, TPP and NAFTA, he has sung the praises of bilateral deals. This has been strongly signalled with the UK in particular. Trump has made some ambitious comments that there is a deal ready to sign once the UK departs the EU.
If this were to happen, tariffs and perhaps other barriers would be removed, with the intention of easing cross-border trade.
The prospects for this are not great, however. With Trump’s “America first” agenda, it is not clear how easily any deals could come to fruition. FTAs are based on compromise, whereby countries grant reciprocal access to each others’ economies. For American companies to gain the ability to win public contracts as part of a deal with another country, access to American government contracts would need to be provided to businesses from the other country.
It is far from clear whether the new administration would accept the American government awarding contracts to more foreign companies, effectively moving the jobs associated with that contract to other countries.
China could be the driving force behind liberalising trade
The second topic is perhaps more pertinent then; this is the possibility that other countries or systems will emerge as the force behind liberalising procurement markets to replace a more protectionist and isolationist USA.
China’s global economic influence is steadily increasing. The TPP’s death presents China with the opportunity to be the leader in free trade. It is the lead behind the proposed Regional Comprehensive Economic Pact (RCEP), which includes sixteen countries, such as Australia, Japan, India and South Korea. In total, RCEP covers 30 per cent of global GDP and around half of the global population.
The agreement focuses on tariff removal, with some harmonisation of standards and intellectual property rights. RCEP is not equivalent to TPP in integrating procurement markets in different countries, however. Whilst procurement teams would benefit greatly from cheaper imports from elimination of tariffs, RCEP does not include detailed provisions of government procurement – non-discrimination does not look likely to be included. The eventual, and lofty, ambition of RCEP is to create a free trade area across the Asia Pacific.
Driving integration in procurement markets
Aside from China, multilateral institutions are perhaps the most likely to drive integration and liberalisation of procurement markets over the coming years. The European Union has long been a driver of liberalisation of procurement markets.
In 2016, the EU signed a detailed FTA with Canada, including detailed provision for procurement. It has pending agreements with countries such as Singapore and Vietnam and is in long-term discussions with an array of countries and trading blocs.
The World Trade Organization’s (WTO), Agreement on Government Procurement (GPA), consisting of 47 members (including the EU28), reciprocally opens procurement markets. It is looking likely that Australia will accede to the GPA in 2017 and discussions of China becoming a full member, further opening up procurement markets.
Also within the WTO, the Trade in Services Agreement (TiSA) is a proposed agreement to ease trade in services. This would include 50 countries, including the EU countries and the USA. With this, trade in services between the countries would become frictionless and there would be elimination of preference for domestic suppliers, which might apply without a minimum value threshold for all government agencies.
Access to global markets is core for procurement
Globalisation continues to be much maligned by electorates and the media. But for procurement teams who rely on sourcing goods and services from around the world, either directly or indirectly, access to global markets is core to maximising value for money and ensuring public services are as effective and cost-efficient as possible. Without engaging in the broader political debates, it is clear that one industry needs access to suppliers of goods and services, without unnecessary barriers – the procurement industry.
Renowned economist and Big Ideas Speaker Dr Linda Yueh explains why CPOs needn’t panic about the President Trump administration but there are causes of concern.
Register as an online delegate for the London Big Ideas Summit 2017 here.
Donald Trump made good on a campaign promise on the first day of his presidency by signing an executive order indicating the United States won’t ratify the Trans-Pacific Partnership (TPP) trade deal.
Though expected, the move caused a media storm and a flurry of responses from politicians and businesses all around the globe. But what does this mean for supply managers?
Many CPOs are understandably nervous about the Trump administration’s policies with regards to global trade. The resurgence of protectionism in the U.S., coupled with the continuing fallout and trade effects of Brexit, has left many procurement professionals wondering which region of the world they should plan to source from in the future.
The TPP was a massive free-trade agreement advocated by the Obama administration, aimed at deepening economic ties between the U.S. and 11 other Pacific Rim nations, cutting taxes, and fostering trade to boost economic growth in the process. Trump argued on the campaign trail that the agreement would be harmful to the U.S. manufacturing sector. As he signed the withdrawal order, he called it “a great thing for the American worker”.
According to Linda, there are three reasons not to panic about what Trump’s protectionist tendencies will mean for procurement, trade, and global supply chains.
We need to keep in mind that trade takes place under WTO rules. China is the U.S.’s biggest trading partner, despite no free trade agreement being in place. Of course, if Trump were to pull out of the WTO, then that would be a game changer. But, globalisation, especially e-commerce and the Internet linking markets and people, will mean that trade is likely to continue across borders as it’s hard to see a significant roll-back Costs of trade, of course, are another issue to be focused on.
Luckily, the Trump administration hasn’t honed in on e-commerce, which is good news for procurement and supply chains. Currently, one in ten transactions are already undertaken via e-commerce, and this figure will continue to grow.
Trump may have moved quickly to sign the TPP withdrawal order on his first day in office, but that wasn’t a formal agreement. Extricating the United States from NAFTA for instance will require renegotiation time and then a period of notice before that free trade agreement would end. Even then, most trade agreements include implementation periods, so a “cliff edge” is unlikely which gives businesses time to plan. Therefore, there’s no need to panic or overhaul your supply chain immediately. But, of course, forward planning and following economic policies would be wise. Also, take Brexit as an example – if Britain succeeds in triggering Article 50 in March 2017, then the UK is scheduled to leave the EU by the end of March 2019 – almost three full years after the people’s vote. And even there, the Prime Minister has indicated that there may be an implementation period to allow more time for businesses to adjust to leaving the Single Market.
Things to watch
So, Linda warns that supply managers should keep an eye on certain factors as global trade adjusts to these seismic political shifts.
1) U.S. border taxes – recently, Trump threatened BMW with a 35 per cent border tax on foreign-built cars imported to the U.S. market. This isn’t an isolated incident and American companies are under even more pressure to produce in the U.S.. Congress is also considering a similar tax, so that is worth bearing in mind as that would have the force of legislation.
2) U.K.Tariffs – one of the consequences of a “hard” Brexit where the UK leaves the EU without any preferential trade deal, which would include no agreement on the Single Market, Customs Union, is the re-emergence of customs for EU trade. Right now, significant customs procedures only apply to non-EU shipments. But, with around half of UK exports going to the EU, taking leave of Britain’s membership in the EU with no deal would means the end of free movement of goods. More customs declarations and duties would raise costs, slow down supply chains and certainly add time at border checks. A potential ‘hard border’ would be a particular issue for Ireland.
3) Resourcing Brexit – the UK Government also needs to think about the resourcing challenges involved in ramping up staff as well as IT systems to cope with the doubling of customs checks on the UK border.
4) NAFTA – As mentioned earlier, Trump has also flagged that the North American Free Trade Agreement (between Canada, Mexico and the U.S.) is up for renegotiation. If you’re a U.S. company, you need to start making plans now about how these changes will affect you. The same applies to any other of America’s free trade deals with 20 countries that Trump would have the authority to re-examine.
What about China?
Globalisation has helped China become a manufacturing powerhouse, but with numerous closed markets.
However, there are very good reasons to continue to do business with China. Wages may be rising but that helps businesses to think about China as a market as well as one production locale in a supply chain. Plus, with growing protectionism in America, China’s President has signalled that China may take more of a lead in globalisation. There’s a lot to watch for.
In short, Linda’s advice to CPOs around the world is keep calm, but keep an eye on the details as the globalisation landscape is shifting significantly. Global trade won’t end tomorrow but it will likely look rather different in the coming years.
Join the conversation and register as a digital delegate for Big Ideas 2017 in London.
The Great British Pound is in trouble again this week and it’s making budding entrepreneurs think twice about their business plans.
Talk of a Hard-Brexit Sparks Global Concern
The pound plummeted to a 31-year low last week sparking global concern. The crash followed Prime Minister Theresa May’s announcement on Sunday 2nd October, which revealed a firm timeline for triggering Article 50 and the beginning of Brexit. Extra fuel was added to the, already well-stoked, fire when the media reported that she would opt for a complete break from Europe- a “hard brexit”. Reports already suggest that a “hard brexit” could result in a loss of 70,000 jobs and cost £10bn in tax receipts.
With the pound sitting at $1.27 against the US dollar, chancellor Philip Hammond scuttled to New York with the hope of reassuring America’s biggest banks about the consequences of Brexit. He will try to convince the Wall Street powerbrokers that London will maintain its position as the world’s leading financial centre once the break from the EU is complete.
The pound is also falling against the euro this week, hitting a five-year low and continuing to escalate concerns.
Weak Pound Triggers Rise in UK Services Sector Prices
The dropping value of the pound is already affecting the UK services sector as input prices rose to a three and a half year high in September 2016.
Companies demonstrated their concerns at the ongoing uncertainty over Brexit implications through their reluctance to forge ahead with confidence.
“It’s clear that the pace of expansion has cooled since the first half of the year, reflecting widespread concern about the potential future impact of Brexit”, David commented.
Is Brexit Scaring Off Entrepreneurs?
The aftermath of Britain’s Brexit referendum back in June 2016 saw a strong display of optimism from many entrepreneurs. Indeed, a survey conducted by the Financial Times confirmed that the majority of founders and investors had confidence in London retaining its status as Europe’s biggest center for start-ups. But, is there a change in the wind?
Diana Paredes, CEO & Co-founder at Suade Labs and passionate entrepreneur spoke with Business Insider last week about the effects Brexit will have on entrepreneurship.
She questions why anyone would opt to start a business in the UK given the current economic climate. Operating in London adds a premium in terms of housing and talent and people often see the many business opportunities on offer as a justifiable compromise for quality of life. However, with the future so uncertain, is it worth the risk and sacrifice?
Existing organisations might also be keen to relocate their bases to elsewhere in Europe where it is cheaper to operate, less isolated and they can continue to be regarded as a European company and not simply a British one.
If you’re an entrepreneur, what are your thoughts? Is the dropping value of the pound enough to make you run a mile from UK business? Let us know in the comments below.
Find out what else has been happening in the world of procurement and supply this week…
Samsung in Trouble Again
It’s been a month since Samsung recalled its new flagship phone, the Galaxy Note 7, following several cases of it exploding and injuring customers.
The company have been issuing replacement devices to customers who bought Galaxy Note 7 phones.
However, a Samsung recently started smoking uncontrollably on a flight before takeoff, forcing the cabin crew to evacuate the plane. This could lead to a second recall and a disastrous outcome for Samsung.
Google announced its Pixel smartphone this week and could be well placed to steal a whole host of disappointed Samsung’s customers.
Supply Chain Leaders Pressured to Embrace Climate Change
Business for Social Responsibility (BSR) meets next month in New York with the current cri de Coeur being “bold climate action”.
Analysts have observed that multinationals must raise their ambitions by investing in climate finance, transition to renewable energy, and find more innovative was of ensuring resilient supply chains.
As well as encouraging change in organisational culture to embrace clean energy and other climate solutions, BSR insist that supply chain managers join Corporate Social Responsibility (CSR) managers in becoming .intrapreneurs.
Supply chain managers can – and must – play a major leadership role in addressing the alarming consequences of aberrant global weather conditions.
Verizon Communications is testing the deployment of large-scale drones to provide mobile connectivity in emergency situations when the land-based cellular network has been damaged.
The drone which is being flown by American Aerospace Technologies, is nothing like the small, quad copter devices flown by amateurs at home. With a 17-foot wingspan, Verizon’s drone more resembles the types of unmanned aircraft used in the military.
Data gathered in Thursday’s trial will be shared with the FAA in order to help craft future rules regarding drones, Verizon said.
Global trade growth has slipped to its slowest rate since the 2009 financial crisis, sparking concerns for jobs and economic growth.
The World Trade Organisation has released figures showing that global growth has fallen to 1.7 per cent in 2016. This is well below the forecast 2.8 per cent growth in GDP outlined by the WTO at the beginning of the year.
It’s expected global GDP growth will remain around 2.2 per cent for 2016, which would represent the lowest figure since the financial crisis in 2009.
The slowdown in growth has been driven by a sharp decline in merchandise trade volumes. These fell in Quarter 1, and then didn’t rebound as expected to the middle of the year.
The WTO have also warned that uncertainty around the UK’s ongoing relationship with the EU following June’s Brexit vote may lead to even slower growth in coming years.
Protectionism Hurting Growth
After an extensive period of global trade growth through globalisation, many countries are now looking to pull both manufacturing and supply chains back within their borders.
A separate report by the International Monetary Fund (IMF) highlighted the role of protectionism in the slowdown. While tariffs on trade are regulated by the WTO, other measures, such as reducing quotas and increasing subsidies for in-country manufacturing, can be used to reduce exports.
This then has a knock-on effect on global trade volumes, and can inhibit development of global supply chains.
Roberto Azevedo, the WTO’s director-general, said, “The dramatic slowing of trade growth is serious and should serve as a wake-up call. It is particularly concerning in the context of growing anti-globalisation sentiment. We need to make sure that this does not translate into misguided policies that could make the situation much worse.”
Job and Economic Growth Risk
The global slowdown in trade has also raised concerns about job creation, and general health of the world economy. Both economic growth and job creation have long been linked to open trade.
Efforts to re-shore manufacturing and supply chains have an impact on global employment. Though it must be said that many organisation are seeing economic benefits from bringing manufacturing back in-house. These benefits are passed on to the both the local and national economies in turn.
However, for many developing countries and smaller companies, the slowdown in trade will hit harder. Roberto Azevedo called on countries to “heed the lessons of history“, and re-commit to open trading to boost economic growth.
Though some positive signs have been seen in the past month or so, the uncertainty remains. The US Presidential Election could fundamentally change the way one of the world’s largest economies interacts with the rest of the world.
And with other major economies not showing signs of quick recovery, it remains to be seen when or if the global slowdown will be arrested.
What are you seeing in relation to global trade in procurement? Is your supply chain suffering from the slowdown? Let us know below.
We’ve taken time out from getting you fit with Career Boot Camp to check out the top headlines this week.
Activists Block Palm Oil Operations
Greenpeace activists are blockading operations of IOI, one of the world’s biggest producers and traders of palm oil.
A group of ten people, including two Indonesian farmers affected by forest fires related to palm oil operations, are blocking access to IOI’s refinery in Rotterdam.
The Greenpeace ship Esperanza is also preventing palm oil from being unloaded from incoming tankers.
Greenpeace is demanding that IOI commits to a sustainable palm oil supply chain before they lift the blockade.