It’s Groundhog Day for the the global economy — May was a rough month and June has started worse with the first day seeing another big fall on global markets last night.

Greece is downgraded, again, Japan remains a worry, the US economy seems to be slowing, doubts about China’s economic growth and property prices, inflation fears, rising prices for gold (but not silver) and 10 year US bond yields under 3% and looking to go lower across the curve.

A year ago overshadowing it all was the question of whether the US Fed would go for another round of easing, which they did, thereby steadying markets as 2010 ground onwards.

Now there’s another big question: what will the Fed do when that easing (called QE 2, and not named after a ship), finishes at the end of this month?

After weeks of blithely assuming that all would be well those tough guys in the markets, the hedgies, investment banks, big fundies and other crawlers along Wall Street, have become nervous that the cheap money punch bowl is about to be taken away.

And what of those purists who loudly damn the Fed and the US government, and others for stoking the fires of hyperinflation by funding a speculative binge instead of hacking and slashing at spending of all types and giving us a dose of salts into the bargain (AKA The Tea Party)?

Well if the US economy slides towards a new period of low or negative growth, watch the US deficit rise, debt surge and unemployment worsen, again. Their rants will fade.

Another recession will almost certainly bring a credit ratings downgrade for the US. The US and its warring tribes (AKA Democrats/Obama and republicans/Tea Partyettes) have their date with destiny in the first fortnight or so of August when the money runs out — the Government can’t spend any more and has to cut deep and hard because the debt ceiling has finally been reached and there are no more accounting tricks left to keep the balls in the air.

Default time. Why worry about Greece when there’s that biggie to contend with?

Of course sentiment could all change (or rebound) if the US May jobs report, due out tomorrow night, shows a massive surge in new gigs: say over 180,000, better still, more than 200,000. That is very possible the way US employment has been growing this year.

The sell off in the US overnight happened for two reasons: surveys of manufacturing activity and confidence last month fell in many economies, but big falls were recorded in the US. That came after a big fall in consumer confidence the day before.

And then the so-called ADP employment figures came out. ADP processes payrolls and some economists reckon it’s a good guide to how jobs figures are going to go. Unfortunately, the ADP report showed only 38,000 new jobs (really pay packets) in May against forecasts of 178,000. That forecast came from the same market ‘experts’ economists, who have been doing badly in the forecasting stakes in the past month in economies like the US, Australia, Japan and Europe.

Despite that record, these forecasts acquire the gospel of a hard and fast figure rather than something more airy fairy. The ADP figures have a poor record in forecasting employment trends. They have under reported the solid growth in US jobs this year (around 750,000 new jobs have been created in the US so far in 2011).

The weekly and monthly US jobs benefits figures are out tonight: a fall will make markets happier, a rise (and this is a volatile series), and it’s gloom and doom all over again.

Those manufacturing surveys had an interesting angle for Australia. The official and private surveys for China are the first issued each month, followed by surveys for other Asian, European and then the US economies.

The reaction to the Chinese surveys yesterday was along the lines ‘China slowing’, then after a few more came out, ‘China slowing, slows’. Then when news of a 7 point plunge in the US survey became known, the reaction was, ‘China doing better than numbers say’.

The official Chinese government Purchasing Managers Index (PMI) of the country’s manufacturing sector fell 0.9 percentage point month-on-month to 52%, according to the China Federation of Logistics and Purchasing (CFLP). It was the second consecutive month of decline for the PMI, which (like similar surveys) measures manufacturing expansion.

That was down from 52.9 in April, which is a clear slowing. And compared to March’s reading of 53.4, May’s outcome was a definite slowing. But the survey showed readings of 52.2 in February and 52.9 in January, so the actual level of expansion is not much different from the start of the year, a bit slower, but not as large as from March.

So the data adds to the view that the world’s second-biggest economy is still slowing, but does not point to a sharp slowdown in its vast manufacturing sector. The other survey, from HSBC/Markit showed a small fall, but the final reading was above the so-called ‘flash’ reading issued 10 days ago which started the current round of China questions.

And that’s good news for the Australian economy. The various manufacturing surveys show that China’s huge and vital sector for us isn’t crunching, crashing or corpsing: activity has slowed, but at nowhere near the slumps seen in the US, or the easing in some other economies in Europe and Asia.

If that continues for the next few months, watch our iron ore, coal and farm exports rebound, erasing the angst over the March quarter fall in GDP of 1.2%. Then it’s Rate Rise Looms headlines all over again.

Peter Fray

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