Manufacturing data showing signs of life

Manufacturing data has been a relentless purveyor of bad news for the best part of the last 24 months, as abnormal growth rates post-Covid turned into a swampy contractionary trend from which the sector has struggled to emerge. Reasons behind the slump differ across geographies, with Germany’s energy situation being the one most commonly in the headlines. But even in the US, where energy prices have not suffered the same surge as in Europe, the ISM Manufacturing index was below the 50.0 mark (indicating contraction) for 26 consecutive months between November 2022 and December 2024.

While the outlook remains challenging, we are seeing some signs of a turnaround. January’s data showed an improvement in several countries, including Germany and France which have been two of the weaker links globally in recent months. The Eurozone number came at 46.6, still in contraction but its best print since May 2024. You have to look all the way back to March 2023 for a better number than 46.6 in the Eurozone. In the US, the ISM Manufacturing number nudged above 50.0 mark in January for the first time in over two years. Unsurprisingly, the Mexican and Canadian manufacturing sectors showed a decline given the huge uncertainty surrounding US tariffs, which is unlikely to go away quickly.

While not every country in the sample exhibited an improvement, the Global Manufacturing PMI composite for January also managed to rise above the 50.0 mark, just the fifth time it has done so In the last 24 months. There were solid gains in the new orders and future output subcomponents as well, which bodes well for short-term trends. The breakdown between consumer, intermediate and investment goods was also encouraging. Consumer goods has outperformed the latter two with readings above 50.0 the vast majority of the time. This is not surprising given the strength of the consumer and the health of labour markets globally, with unemployment figures that are for the most part relatively close to multi-decade lows. The investment goods component, on the other hand, has been in contraction mode for close to two years. While we will have to wait a few more months to see this number breaking the 50.0 mark, it is nevertheless worth highlighting that the category seems to be finding a bottom in the high 40s, with a mini upward trend emerging over the last three months.

We are definitely not calling the start of a boom phase in global manufacturing. Uncertainty will remain in the near term, with weak demand for the likes of electric vehicles and tariffs headlines making it a challenging environment for companies to invest. However, 2025 might be the year when the sector starts contributing to global growth once again after a long hiatus. This could be an important development for credit quality in non-financials, since a significant percentage of downgrades has come from sectors related to manufacturing in the last couple of years. While we wouldn’t be advocating for large exposures to industrials or materials at this stage, we think this is a trend worth watching as it might result in better rating upgrade-to-downgrade ratios and potentially lower defaults than expected.