US manufacturing grew at a surprisingly strong pace in June, suggesting the global economy is starting to shake off its recent weakness, but the sector lost steam for a second month in Europe and Asia. The US Institute for Supply Management report may offer some relief to Federal Reserve officials who have argued that many of the factors holding back the US recovery are temporary.
Economists cautioned it was too soon to say the US recovery had overcome the malaise of the first half of 2011. "Even though the US ISM surprised to the upside, you are still seeing evidence of a soft patch globally. There is still a lot of uncertainty out there," said Michael Hanson, senior economist at BofA Merrill.
Purchasing managers' indexes in Asia and Europe slid to multi-month lows in June as factories fought a twin battle with weak consumer demand overseas and tightening monetary policy at home. Economists have blamed a combination of supply disruptions due to the devastating earthquake and tsunami in Japan, oil price rises and Europe's sovereign debt crisis for the sputtering global recovery.
The US ISM said its June index of national factory activity rose to 55.3 from 53.5 the previous month. The reading topped expectations for a fall to 51.8, according to a Reuters poll of economists. "It sets the groundwork for acceleration in growth for the second half of the year," said Michael Gapen, director of US economic research at Barclays Capital in New York.
Digging into the details, though, analysts noted pockets of weakness. New orders, for example, rose only marginally to 51.6 from 51.0. In Asia, central banks have been raising interest rates aggressively, hampering economic growth in the process. The European Central Bank is expected to raise rates again next week after hiking in April.
That contrasts with the US Federal Reserve, which has pledged to keep interest rates extraordinarily low for an extended period. In Europe, new orders for manufactured goods across the 17-nation bloc that shares the euro fell for the first time in nearly two years, while the new export order index echoed the previous month's rapid fall.
The Markit Eurozone Manufacturing Purchasing Managers' Index fell to 52.0 in June from 54.6 in May, its lowest reading since December 2009, in line with an earlier flash estimate. More worrying for European policymakers, the data again highlighted a two-speed economy, with a more resilient Germany and France propping up the bloc's weaker constituent parts, though even these powerhouses showed a considerable slowing in growth.
In China, the official PMI fell to a 28-month low of 50.9, indicating production grew only marginally from the previous month, leading some analysts to predict Beijing may be less aggressive in tightening monetary conditions later this year. Indian manufacturers also seemed to be under pressure, with the HSBC Markit PMI dropping more than two percentage points to a nine-month trough of 55.3. It was the steepest monthly fall since November 2008, when global trade collapsed following the bankruptcy of investment bank Lehman Brothers.
While months of policy-tightening no doubt contributed to slower growth in both China and India, they are also feeling the pinch from cautious shoppers in key export markets in the United States and Europe. The official sub-index for new export orders in the China PMI fell to 50.5 in June as backlogs for new orders shrankk for a second straight month J.P. Morgan's Global Manufacturing PMI, also released on Friday, showed the sector grew at its slowest pace in June in nearly two years.
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