Mixed Manufacturing Data Suggests Global Weakness and Slow Growth

Last week, Markit’s flash U.S. Purchasing Managers’ Index registered 51.9, its lowest reading since October and the second consecutive month of slowing growth. The news, combined with nebulous but largely negative manufacturing reports from the Federal Reserve Banks of Richmond and Dallas, helped create a picture of a struggling manufacturing sector.

Growth in the manufacturing sector has slowed considerably since the beginning of the year, and Markit Chief Economist Chris Williamson suggested that, at best, the sector would provide a modest boost to overall economic output. Growth in the first quarter slowed from an annualized rate of 4.9 percent to just 1 percent by May’s flash reading.

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The final PMI report, released on Monday, showed a fractional improvement over the flash reading. At 52.3, the final data suggests that manufacturing activity actually expanded sequentially compared to April’s reading of 52.1. Growth was led by an increase in output and new orders.

U.S. Markit

“The May survey paints a downbeat picture of U.S. manufacturing business conditions. Output, order books, and employment are all growing modestly, suggesting the sector is at risk of stalling. The main weakness is from export markets, where new orders fell marginally due to weakening global demand,” commented Williamson.

Large manufacturing firms (those with more than 500 employees) reported a much stronger rise in production levels than small manufacturing firms (those with fewer than 100 employees). The report indicates that much of the total increase in new orders is a function of domestic demand, given a contraction in the number of new export orders.

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A rise in both input and output prices is interesting to anyone keeping a close eye on inflation. Price pressures at the producer level could work their way through the pipeline and ultimately manifest in the U.S. Federal Reserve’s preferred inflation measure, the personal consumption expenditures index. As it stands, inflationary pressures in the U.S. have been surprisingly weak given the amount of monetary easing that the Fed is engaged in.

Williamson suggested that “the short-term outlook is one of subdued growth at best, suggesting the recent slowdown in the manufacturing economy will add to the likelihood of GDP growth weakening in the second quarter.”

Meanwhile, the reading of the Markit Final Eurozone Manufacturing PMI for May came in at 48.3, above the flash reading of 47.8, and the strongest reading in 15 months. The results reflect an easing in the downturn that has gripped Europe since the crisis began, but conditions still remain in contraction. Deflationary pressures are still a concern with input costs and output prices both declining.

“Despite the final PMI coming in above the flash reading, the surveys still suggest that GDP is likely to have fallen 0.2 percent in the second quarter, extending the region’s recession into a seventh successive quarter,” commented Markit Chief Economist Chris Williamson.

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Separately, the HSBC China Manufacturing PMI decreased from 50.4 in April to 49.2 in May, the first contraction in manufacturing in seven months.

Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC commented: “The downward revision of the final HSBC China Manufacturing PMI suggests a marginal weakening of manufacturing activities towards the end of May, thanks to deteriorating domestic demand conditions. With persisting external headwinds, Beijing needs to boost domestic demand to avoid a further deceleration of manufacturing output growth and its negative impact on the labour market. The new leaders should strike a delicate balance between reform and growth.”

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