Global manufacturing index hits three-year low

Much like the US manufacturing index, the global manufacturing index has hit three year lows. The numbers indicate a contraction in global manufacturing activity, with the JPMorgan Global Manufacturing PMI now below 50% at 48.9% for June 2012 from 50.6% in May. This is the lowest level since May 2009.

The decline in the US was particularly marked and unexpected, with 0 of 70 economists predicting a figure below 50%. Estimates of those 70 economists ranged from 53.5 at the high end to only as low as 50.5 on the low end. A few regional manufacturing indices already foreshadowed this bad number, particularly in new orders. Sso it’s not clear why economists were so high in their predictions. For example, the Empire State report for New York showed new orders falling to 2.18 from 8.32, The Philly Fed new orders number also fell, going from -1.2 to -18.8. The Richmond Fed’s numbers showed a fall to -12 from 1, and the Kansas City Fed showed a decline to -7 from 10. Only the Dallas Fed survey showed an increase in new orders.

Note that ISM says that while 50 means the manufacturing sector is contracting, going below 42.6 is the point that generally indicates the US economy as a whole has contracted.

Declines accelerated in China, Brazil, and Vietnam.  Japan, Taiwan, and South Korea moved from expansion to contraction. As with the US index, it is the new orders number which is most worrying, as the new orders subindex slipped to 47.8 from 51.5. Output, input prices and employment subindices all fell, with only employment above 50, the cutoff between contraction and growth.

In the euro zone, only Austria and Ireland reported an expansion in manufacturing last month. The euro zone PMI is also at a three-year low of 45.1. Germany saw the steepest decline with a PMI of 45.0.

Commenting on the data, David Hensley, Director of Global Economics Coordination at JPMorgan, said:

“The global manufacturing PMI fell below 50 for the first time since last November and only the second time in this expansion. Inventory adjustments appear to be driving the contraction in manufacturing, with the PMI showing that the rate of stockbuilding (finished goods) remains quite elevated amid sluggish gains in final expenditures.”

Conclusion: As I commented recently, the global growth slowdown is indeed accelerating. Moreover, the slowdown is just now hitting core Europe with full force and this suggests that Germany’s GDP numbers will surprise to the downside. From a political perspective, I expect this turn of events to lessen Germany’s desire to provide bailouts. Perhaps then, it will increase pressure on the ECB to pick up the slack through debt monetisation. It bears watching how the slowdown in the core affects the political mood regarding the sovereign debt crisis because it could have a sizable impact on the political process.

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