Markets worked themselves into a froth overnight after the June survey of US manufacturing showed a surprise fall for the first time in three years. They shouldn’t been so worried.
While there are signs of a slowing in the US economy, it is not as bad as much of the analysis claimed. The survey, from the Institute of Supply Management was a shock because it showed a much bigger fall than expected, so US markets worried and economists immediately started talking about the spread of a slowdown from Europe and China to the US.
But much of the commentary was over the top. As the institute said in commentary: “The PMI registered 49.7%, a decrease of 3.8 percentage points from May’s reading of 53.5%, indicating contraction in the manufacturing sector for the first time since July 2009, when the PMI registered 49.2%.” And why was the reaction was over the top? Because a reading just under 50 doesn’t show the US economy is in a recession, it is still growing.
In fact the ISM said the 49.7 reading is consistent with an economy growing around 2.4% a year, “if the PMI for June (49.7%) is annualised, it corresponds to a 2.4% increase in real GDP annually,” the ISM said. That’s a little faster than the 1.9% annual rate in the first quarter and the institute also commented “the overall economy grew for the 37th consecutive month,” the ISM said in the statement.
Get Crikey FREE to your inbox every weekday morning with the Crikey Worm.
Now it seems growth momentum in the economy is fading and if it continues, the economy could slow even further. That was one of the reasons the reaction was startled. Another was the biggest one-month drop in new orders since October 2001. The new-orders index now stands at 47.8%, a very low level. But employment remains strong with a reading of 56.6, down just 0.3 from May.
By way of comparison, the PMI for Australian manufacturing improved noticeably, but was still in a contractionary state. The index rose 4.8 points to 47.2 points last month, better than much of Europe and close to the level of China in one of its two surveys.
And US manufacturing only accounts for about 10% of the US economy (similar to the level in Australia), and the reason the report generated the “shock, horror” reaction was the size of the fall, the fact that it was bigger than forecast, and because the US, while the manufacturing sector has been the most robust part of the economy, is coming out of the recession. The ISM for the services part of the huge US economy will be a far more accurate guide to the health of the US economy. It’s out later this week.
A similar overreaction has been occurring with the monthly surveys of Chinese manufacturing. The latest for June were released on Sunday (The official from from the government) and the HSBC Markit survey out yesterday showed that China’s manufacturing sector has now been contracting for up to eight months, but that hasn’t seen the economy slide into a recession, as much of the Western analysis would suggest. What has happened is that Chinese economic growth has slowed from more than 9% to just over 8%, and probably closer to 7% in the just-ended June quarter. The official data will be issued later this month by the Chinese government. If growth is running about 7% to 7.5%, there’s nothing startling about that. After all 7.5% growth in GDP is the official target this year and 7% is the aim for the new five-year plan.
It’s just Western economists and companies are used to China exceeding its previous 8% annual growth rate by big margins, especially in 2009-11. That’s obviously not going to occur this year because of the campaign to slow the economy and bring down inflation, which has happened, especially to producer prices, which are now negative.
To get a handle on PMI readings from countries in recession, look at Greece (a four-month low) and Spain (a 37-month low) where June saw further contractions, to 40.1% and 41.1% respectively. The big worry in Germany where the PMI fell to a three-year low of 45%, down from 45.2 and just under an unchanged eurozone reading of 45.1%. Again it was the surprise of the sharp fall in Germany (the zone’s strongest economy) that was one of the reasons markets fretted. Another was the latest employment rate showing the zone’s jobless rate hit a record 11.1% in May. Unemployment has now risen by more than 1.8 million in the year to May and the rate for people under the age of 25 is now more than 52% in Spain and Greece.
All this means the European Central Bank will almost certainly cut rates by 0.25% at this week’s meeting, although the odd economist reckons a 0.50% chop might happen. In Australia we won’t get a rate cut from the Reserve Bank this afternoon, nor will we get one for some time. Credit growth is running at three-year highs (especially for business), house prices jumped 1% in June, jobs growth is better than expected, new car sales remain strong and this is despite the continuing fall in our terms of trade. The Aussie dollar hit a two-month high overnight of $US1.0279.