GEP: Suppliers Underutilised for First Time Since April

Capacity among global suppliers is being underutilised for the first time since April, according to the GEP Global Volatility Index, which monitors demand, shortages, transportation costs, inventories and backlogs via a survey of 27,000 businesses each month.

Despite this, GEP believes there's no need for alarm.

Key insights from July's index

• Global supply chain spare capacity has increased, intensifying calls for the Federal Reserve to lower interest rates sooner.
• Asian factory demand is at its weakest since December 2023, mainly due to reduced purchasing by Chinese factories.
• Suppliers to North America report underutilised capacity, with Mexican manufacturers noting lower input demand for the first time since October 2023.
• Europe’s manufacturing recession continues, resulting in general market struggles.

Purchasing activity in North America slows

The August GEP index reveals localised issues affecting supply chains worldwide, with Europe facing the most significant challenges as it grapples with ongoing manufacturing recession, particularly in Germany.

In Asia, growth has slowed, with factory demand in the region hitting its lowest point since December 2023. This is partly due to a significant drop in purchasing activity by Chinese factories, marking the first decline in nine months. Japan's manufacturing sector also contributed to the region's slowdown.

North American suppliers reported slightly underutilised capacity in July, continuing a trend from June. Slow purchasing activity was evident across the US Mexico and Canada, with the latter experiencing the steepest decline. Notably, Mexican factories, which had driven regional growth earlier this year, saw 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 at 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.”

What did supply chains look like in July?

Input demand: Global factory purchasing activity, which had recovered earlier in the year, fell sharply in July, marking the most significant decline since late 2023. This renewed weakness in the global economy was primarily driven by a slowdown in Asia, particularly in China and Japan. Europe's manufacturing recession also persisted, with German factory purchasing contracting sharply.

Inventories: The inventory cycle has stabilised, with reports of safety stockpiling due to price or supply concerns remaining below typical levels. Overall, inventory levels have aligned with their long-term average so far this year.

Material shortages: Reports of material shortages slightly decreased in July, reaching their lowest level since January, indicating that vendors of critical raw materials and commodities are maintaining high stock levels.

Labour shortages: Labour supply is not currently a major issue for global manufacturers, with reports of backlogs due to staffing shortages at typical levels.

Transportation: Despite a dip in supply chain activity in July, global transportation costs have risen to their highest point in 21 months, largely driven by increased costs in Asia.

Regional variations

North America: The index remained unchanged at -0.11, indicating slightly underutilised capacity across the region's suppliers. Manufacturers in the US, Mexico and Canada all reported a softening of demand in July.

Europe: The index fell sharply to a three-month low of -0.49, down from -0.13. Europe’s manufacturing sector continues to struggle, with major economies like Germany at the heart of the decline.

UK: The index dropped to 0.11 from 0.49 in June, but still indicates capacity pressures among UK suppliers.

Asia: The index slipped from June’s 16-month high of 0.35 to 0.07, its lowest since April. Demand for inputs at Asian factories was at its weakest this year, mainly due to a softening in China and Japan.

How does GEP's Global Supply Chain Volatility Index work?

The GEP Global Supply Chain Volatility Index, developed by GEP and S&P Global, is a monthly report put together by S&P Global and GEP. 

It draws from S&P Global's PMI surveys, which are distributed to 27,000 companies worldwide, a weighted aggregation of six sub-indices derived from PMI data, PMI Comments Trackers and PMI Commodity Price & Supply Indicators provided by S&P Global.

A positive value in the index indicates strained supply chain capacity, leading to increased volatility. Conversely, a negative value suggests underutilised supply chain capacity, resulting in reduced volatility. 

The index is published monthly, with the July survey available for review here.

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