We don’t need an inverted yield curve to tell us a global manufacturing downturn may be underway.

The business networks were flashing red all day last Wednesday as the spread between the U.S. Treasury 2- and 10-year yields turned negative for the first time since 2007.

We’ve written a lot about why we think the yield curve is a less reliable forecaster of recession than it used to be. But to be honest, the point now seems a little academic. Looking to the yield curve for signs of a slowdown last week was like checking the barometer while your roof was getting blown off.

To gauge the pressure in the global economy, look at China and Germany—and last week the winds there turned very cold indeed.


On Monday we got weak credit and money growth data from China; that was worrying because credit growth has tended to be a good leading indicator for the wider economy. On Wednesday China reported its weakest industrial production growth for 17 years, weak retail sales, soft fixed asset investment and an uptick in unemployment.

On the same day we learned that Germany’s economy shrank in the second quarter. A recession now seems likely. That data hit less than 24 hours after a miserable read from Germany’s ZEW Economic Sentiment Index.

For a year now, we have been talking about a soft-landing slowdown in the U.S. and a potential stabilization of growth in the rest of the world. We still anticipate a soft landing for the U.S., but China is struggling to find the bottom and Germany appears to be in freefall.

Uniquely Geared to Powerful Forces

Furthermore, this is not the tale of a few quarters.

In January 2018, following a year of synchronized global growth, many of the world’s equity markets hit a peak: manufacturing Purchasing Managers’ Indices in the 12 largest economies were all showing expansion, and Germany’s topped the table with a reading of 61.1. Today, only four show manufacturing in expansion, and Germany is at the bottom of the pile at 43.2.

In fact, this story goes back much more than just a couple of years. Germany has spent a generation uniquely geared to three powerful forces: a euro that was weak relative to the strength of the German economy; a world that couldn’t get enough of German cars and machinery; and the growing proportion of global GDP growth driven by international trade.

Today, Germany is struggling because it is on the wrong side of a sea change in the global autos market, and because trade as a share of global growth has been shrinking for a decade. The U.S.-China trade dispute, which now looks set to step up a notch as we head into the fall and winter, is just the latest, most disruptive stage of that trend.

These are structural rather than merely cyclical issues.

Fiscal Support

If Germany is the canary in the coalmine of a global manufacturing downturn, where can we potentially find the escape route?

We have been contrasting the weakness in manufacturing with the resilience of the consumer, but as a downturn deepens it is likely only a matter of time before jobs start to disappear and that confidence gets sapped. Shoppers likely won’t spend their way out of this alone. Global manufacturing may face a period of substantial restructuring that will require fiscal support.

Germany should join China in leading the way: it is the country most geared to the old model, and a generation of success has left it with the most fiscal latitude. Will it do so? That will require a big change in political culture.

The risks have certainly not gone unnoticed. Speaking in response to the latest data, the German Minister for Economic Affairs, Peter Altmaier, called the latest figures “a wake-up call and a warning.”

“We are in a weak growth phase but not yet in recession, which we can avoid if we take necessary measures,” he said. “Politicians and business must now act together.”

However this pans out, volatility and disruption are on the horizon. Capital investments predicated on expanding global trade and global integration could increasingly be at risk. When we revisit our quarterly outlooks in six weeks’ time, do not be surprised to find us adopting a more cautious and defensive stance.

In Case You Missed It

  • U.S. Consumer Price Index:  +0.3% in July month-over-month and +1.8% year-over-year (core CPI increased 0.3% month-over-month and 2.2% year-over-year)
  • Euro Zone 2Q 2019 GDP (Second Estimate):  +1.1% annualized rate
  • U.S. Retail Sales:  +0.7% in July
  • NAHB Housing Market Index:  +1 to 66.0 in August
  • U.S. Housing Starts:  -4.0% to SAAR of 1.19 million units in July
  • U.S. Building Permits : +8.4% to SAAR of 1.34 million units in July

What to Watch For

  • Wednesday, 8/21:
    • U.S. Existing Home Sales
    • FOMC Minutes
    • Japan Purchasing Managers’ Index
  • Thursday, 8/22:
    • Euro Zone Purchasing Managers’ Index
    • U.S. Purchasing Managers’ Index
    • Japan Consumer Price Index
  • Friday, 8/23:
    • U.S. New Home Sales

– Andrew White, Investment Strategy Group

Statistics on the Current State of the Market – as of August 16, 2019

Market Index WTD MTD YTD
S&P 500 Index -0.9% -2.9% 16.7%
Russell 1000 Index -1.0% -3.1% 17.0%
Russell 1000 Growth Index -0.7% -2.2% 21.5%
Russell 1000 Value Index -1.4% -4.0% 12.5%
Russell 2000 Index -1.2% -5.1% 11.7%
MSCI World Index -1.2% -3.4% 13.9%
MSCI EAFE Index -1.4% -4.3% 8.2%
MSCI Emerging Markets Index -1.0% -6.3% 2.6%
STOXX Europe 600 -1.3% -4.2% 9.0%
FTSE 100 Index -1.5% -5.4% 9.5%
TOPIX -1.2% -5.1% 0.8%
CSI 300 Index 2.2% -3.1% 25.9%
Fixed Income & Currency      
Citigroup 2-Year Treasury Index 0.3% 0.9% 3.2%
Citigroup 10-Year Treasury Index 1.7% 4.4% 12.1%
Bloomberg Barclays Municipal Bond Index 0.5% 1.6% 7.6%
Bloomberg Barclays US Aggregate Bond Index 1.0% 2.3% 8.8%
Bloomberg Barclays Global Aggregate Index 0.5% 2.0% 7.3%
S&P/LSTA U.S. Leveraged Loan 100 Index -0.3% -0.8% 7.1%
ICE BofA Merrill Lynch U.S. High Yield Index -0.1% -0.9% 9.8%
ICE BofA Merrill Lynch Global High Yield Index -0.5% -1.0% 8.7%
JP Morgan EMBI Global Diversified Index -0.7% 0.1% 12.7%
JP Morgan GBI-EM Global Diversified Index -0.5% -1.6% 8.0%
U.S. Dollar per British Pounds 0.5% -0.8% -4.7%
U.S. Dollar per Euro -0.9% -0.3% -2.9%
U.S. Dollar per Japanese Yen -0.7% 2.1% 3.1%
Real & Alternative Assets      
Alerian MLP Index -0.7% -6.6% 9.1%
FTSE EPRA/NAREIT North America Index 0.4% 1.9% 20.9%
FTSE EPRA/NAREIT Global Index 0.1% -0.2% 15.4%
Bloomberg Commodity Index -0.8% -2.7% 1.6%
Gold (NYM $/ozt) Continuous Future 1.0% 6.0% 18.9%
Crude Oil (NYM $/bbl) Continuous Future 0.7% -6.3% 20.8%

Source: FactSet, Neuberger Berman.