Asian Manufacturing Activity Falls to 17-Month Low Amid Tariff War: GEP

GEP’s Global Supply Chain Volatility Index fell to -0.46 in May, from -0.39 in April, signaling increasing spare capacity across the world's supply chains as a result of tariffs and tit-for-tat trade war.

"U.S.-China trade talks come at a critical moment — Chinese factory demand has dropped sharply, and U.S. manufacturing is weighed down by excess capacity," says John Piatek, VP consulting, GEP. "This isn't just macro noise. Tariffs are already reshaping procurement strategies as companies front-load inventories, diversify suppliers, and brace for a longer game of economic decoupling."

Key takeaways:

·        Global supply chain activity was driven lower by a deterioration across Asia, which reported the greatest degree of spare capacity in almost 1.5 years. The quantity of raw materials and components purchased by Asian factories weakened for the second consecutive month in May, signaling stronger retrenchment. Notably, China was central to this regionwide decline during May.

·        North America's supply chains remain underutilized due to considerable weakness in Mexico and Canada. In the United States, manufacturers continue to be underutilized, but they increased purchases of raw materials and commodities, bolstering inventories to protect against future higher prices or supply disruptions.

·        The European industrial sector edged closer to recovery, with activity at the region's suppliers broadly level with April, which was the strongest for 10 months. Manufacturers on the continent have been buoyed by recently announced fiscal stimulus measures, particularly in Germany. The UK's supply chains remain severely underutilized, with the country's manufacturers retrenching aggressively again in May.

• In North America, the index rose to -0.24, from -0.34, reflecting some pickup in purchasing volumes in the U.S., driving supply chain activity higher. Weak conditions in Mexico and Canada continue to weigh on manufacturing in the region.

• Global demand for raw materials, commodities and components remained subdued, with no improvement seen since April, meaning it remains at its weakest in the year-to-date. Procurement activity in Asia was down at its sharpest in nearly a year and a half, driven by retrenchment among Chinese factories.
• Global safety stockpiling reports remain historically low, primarily due to inventory strategies in Europe, with manufacturers across the continent continuing to favor lean warehouses. This contrasts with the trend in North America, with safety stockpiling above its long-term average for a second successive month.
• GEP’s global item shortages indicator remains below its long-term average, signaling robust global material supply levels. This metric implies that vendors have stock to meet orders from their customers.
• Reports of backlogged work rising due to staff shortages ticked up slightly at the global level in May but overall, remain close to historically typical levels, indicating that suppliers' workforce capacity remains sufficient to cope with current demand.
• Global transportation costs were broadly in line with their long-term average in May.