We have seen a host of manufacturing sector data over the past few days. Most of it has been pretty good and the data demonstrate that the global recovery has continued. Nevertheless, reviewing the data from the US, Europe, China and Singapore, there are some weaknesses beginning to show which I believe will become more troublesome given job losses associated with fiscal austerity.
The US data was pretty robust, with the PMI coming in at 59.7, well above 50 percent above which indicates the manufacturing sector is expanding. The Institute for Supply Management (ISM) also indicates that "over a period of time" a 42 reading is consistent with overall economic expansion. Moreover, all of the important subcomponents are still strong from New Orders to Production and Employment. For me, the fact that inventories and customer inventories are still low, speaks to the potential going forward. So, the bottom line is that the ISM data are telling a bullish story.
The fly in the ointment comes from the ECRI data which Albert Edwards first highlighted in April. This data set tells a story of a slowing recovery, a trend surely to be exacerbated by the cuts in state and local budgets and workers.
In Europe, we see much the same dynamic, manufacturing growth but signs of a slowdown coming. Marc Chandler explained earlier today:
Europe, of course, has already reported the non-manufacturing PMI for May. It generally fared better than the manufacturing reading. Overall, for the euro-zone the May reading was 56.2, an advance from the 55.6 reading in April. While most countries showed improvement, Italy was a notable exception. The euro failed to make much headway on the news, but it did appear to weaken following news that April retail sales fell 1.2%. This was much worse than the 0.1% gain the Bloomberg consensus expected and was not really blunted by the upward revision to the March series from flat to +0.5%.
Marc also noted that the UK came in below expectations at a still expanding 55.4. We all know fiscal austerity is bound to weaken this picture medium-term, with the individual countries and municipalities playing the same role that individual states and municipalities will in the US.
In China, Andy Lees of UBS noted on Tuesday that the same slower growth dynamic is at work:
The PMI index slipped to 53.9 from 55.7 with the HSBC index falling to an 11 month low of 52.7 from 55.2. The loss of momentum was broad based across both surveys, with the pace of output, new orders and employment all slowing. Passenger car sales growth slowed to 25% y/y, lowering growth for the first 5 months to 28.7%. HSBC said that “China’s GDP growth should continue to cool off in the second half of 2010 which is a must to contain inflationary risk. Despite the property measures and uncertainties on exports, GDP growth is still likely to stay around 9% in the second half, thanks to continued investment into ongoing infrastructure projects and steady growth in wages and consumption”. It should be noted however that the local authority led infrastructure programmes may struggle to get bank funding whist the reserve requirements are so high.
And finally, in Singapore, we got the most bullish of all the reports. Marc Chandler explained yesterday that he sees Singapore as a bellwether amongst Asian manufacturers and that’s a good thing:
Singapore May PMI came in stronger than expected at 52.2 vs. 51.9 in April, signaling continued expansion in its manufacturing sector. This also supports our long-held fundamental view that the Asia macro outlook remains the strongest amongst the EM regions. The headline PMI remained above the 50 boom/bust line for the thirteenth straight month. Looking at the PMI components, new orders rose to 54.1 from 53.7, new export orders rose to 55.4 from 54.8, and production rose to 54.9 from 52.5. The electronics sector subcomponent jumped to 53.7 from 51.8 in April, and forward-looking components there remain extremely encouraging for that segment of industry worldwide. Electronics new orders rose to 56.5 from 55.2, while electronics new export orders rose to 58.9 from 56.7. Given Singapore’s position as a regional bellwether, markets should feel even more confident about the Asian economic outlook as forward-looking indicators point to a strong Q3.
If you put all of these pieces together it paints a picture of a global economy which is doing pretty well right now. Employment in Europe and the US are the huge drags on growth. But the emerging markets are chugging along. The downside risks are mainly about fiscal austerity, the sovereign debt crisis and the knock-on effects in the financial and property sectors. Given my recent comments about how US jobless claims stalled in 2003, I don’t see these risks as necessarily fatal to the global recovery. I do see them as major risks, however. And Europe is the most vulnerable market.