In July, the GEP Global Supply Chain Volatility Index 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," explains 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."
Key Takeaways:
- 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.
