Global Manufacturing Green Shoots?

As August winds down, we have our first economic temperature check for the month. Yes, flash global purchasing managers’ indexes (PMIs) are out! These preliminary surveys, which reveal the breadth of firms’ growth (but not its magnitude), suggest ongoing, services-led expansion in the world’s developed market economies.^[i] Meanwhile, although manufacturing PMIs remain mostly contractionary, we see hopeful nuggets in the long-beleaguered sector.^[ii] We think this is notable since it occurred even as the new US reciprocal tariffs took effect this month, perhaps implying the world is starting to move forward. Regardless, we find the bigger picture of overall global growth stands, undercutting the widespread warnings of economic trouble and showing in part what we think global stocks have been pricing in.

Exhibit 1 shows the bulk of developed market economies’ business activity expanding, as services continue to do the heavy lifting. Composite PMI readings combine services and manufacturing output, with readings above 50 indicating a majority of private sector firms surveyed see growth.^[iii] Since services make up more than two-thirds of many developed market countries’ annual economic output, if over half those firms are experiencing expansion, then that is generally a good sign to us.^[iv] With all save France’s composite PMIs above 50 through August, broadly matching services’ direction, the global economy appears to remain on growthy footing.

Exhibit 1: As Go Services, So Go Composite PMIs Generally

Source: FactSet, as of 21/8/2025. Note: August’s PMI readings are flash estimates based on preliminary calculations from around 80% to 90% of total responses.

But even France is just a couple hairs short of the mark. And French gross domestic product (GDP) grew through Q2 despite sub-50 composite readings.^[v] Since PMIs reveal only the percentage of firms reporting growth—not how much activity rose or fell—an expansionary minority can still mathematically outweigh those contracting. This is why it is difficult to draw big conclusions when PMIs are just below or over 50, in our experience.

Also noteworthy: UK services PMI’s bump higher. Whilst a 1.8 point rise further into expansionary territory isn’t necessarily eye-popping, the improvement is striking amidst constant warnings from financial publications we read about April’s employer National Insurance hikes crushing services especially hard. Expansionary PMIs indicate the vast majority of the British economy appears to be clawing forward, in our view. We think this underscores the yawning gap between reality and sentiment—the proverbial wall of worry stocks are often said to climb remains high.

Whilst services are still the main engine driving developed market economic growth, we see some encouraging signs manufacturing is starting to perk up. Besides expansionary manufacturing PMIs in America and the aggregate eurozone, Japan’s, Germany’s and France’s are just a hair under 50—on the cusp of growth.^[vi]

This is all early days, of course, and nascent stabilisation isn’t rip-roaring growth. But the backdrop here is worth considering, as it shows how reality may beat expectations. Early 2025’s tariff talk seemed to cause two things in the short term: uncertainty and stockpiling as businesses raced to beat extra charges. Perhaps the uncertainty is now beginning to fade as trade deals conclude, firms know the lay of the land better and, seeing more stability, manufacturers feel more confident about their prospects. Not only do the data seemingly indicate the increasing likelihood of manufacturing green shoots to us, so do markets with Industrials outperforming global stocks year to date.^[vii]

As our research shows, markets move first. And as timely as PMI data are, we think all this is mostly in the rearview for stocks, which we find look roughly 3 to 30 months ahead. However, we can peer somewhat into the future and take a few cues from PMIs’ new orders—a leading indicator, as today’s bookings are tomorrow’s production and billings. And new orders are faring broadly fine, rising across most of the developed world’s services sectors, though they are more mixed in manufacturing.^[viii] Here is how S&P Global describes America’s outlook: “new order inflows in the goods-producing sector also picked up in August, with growth hitting the highest since February 2024 principally on the back of rising domestic demand but also helped by the largest rise in goods exports for 15 months.”^[ix]

Now, some of this may be an after-effect of early-year inventory builds, with firms needing to replenish after running down pre-tariff stockpiles. “While many manufacturers reported improved sales and demand, the upturn in production and order inflows was in part linked to renewed inventory building. Stocks of finished goods rose to an extent not previously recorded since data were first available in 2007 ...”^[x] Whether this is good or bad depends on sales’ holding up, but it does suggest to us the wheels are starting to turn again after tariff uncertainty seemingly threw some sand in the gears. Moreover, most countries didn’t enact retaliatory tariffs against the US, enabling them to return mostly to business as usual with US suppliers.^[xi]

Meanwhile, although manufacturing orders in the UK and Japan were weak, eurozone manufacturing new orders expanded even though businesses there now face a 15% US tariff, perhaps a sign that just knowing the lay of the land is helping businesses move forward.^[xii] Manufacturing may not be firing on all cylinders, but that is well reported amongst commentators we follow, and nascent glimmerings point to a potentially better-than-appreciated reality than most think.

So we see a high likelihood of more of the same: overall global economic growth led by services. Whilst the jury is still out on manufacturing, stocks don’t seem to have missed it.^[xiii] Scale and perspective are key, of course. Given its small role in developed-world economies, manufacturing’s woes weren’t a massive headwind, in our view. We think any tailwinds are therefore probably slight at a macroeconomic level. But for stocks, we observe it is all about sentiment versus reality. If a sector that gets outsized attention and is a chronic source of angst beats meagre expectations, we find that is generally good enough.