Stock markets in Europe, Asia and the U.S. rallied strongly on August 1st even though reports from purchasing managers in China, the EU and the U.S. did not bode well for future economic activity.
In China, the HSBC PMI (purchasing managers index) for July was 49.4. This indicates Chinese manufacturing contracted last month (50 is the dividing point between expansion and contraction for all the PMI indices). The official Chinese government report though came in at 51.2, indicating a slight expansion was still taking place. China is the growth engine of the world economy and a downturn there has negative implications far and wide. Mainstream media tried to put a positive spin on the news by saying the Chinese government wanted to slow the Chinese economy down, so a drop in manufacturing activity is good news. What the government actually wanted to do was slow down the property bubble created by their massive stimulus program during the Credit Crisis. They did not wish to slow down activity related to exports, which is their bread and butter. That seems to be an unfortunate side effect of their actions, however.
While the news out of China was unabashedly bad, traders in the EU were ebullient that the EU purchasing managers July number was revised up to 56.7 from a previous estimate of 56.5. This change is statistically meaningless. Based on the data available, it also looks like Germany was almost single-handedly responsible for the good number. Exports were the key. The big drop in the euro to 1.18 in early June (from around 1.50 late last year) would certainly have boosted exports from the EU since it made their goods much cheaper - and Germany's economy is export based. However, the report also indicated that export orders are slowing (as the euro rises) and new orders are well below this year's peak. The service providers in the report also had the most negative outlook for future activity in eight months.
The U.S. PMI was 55.5 for July, down from 56.2 in June. Of the components in the index, New Orders were down the most, dropping 5.0. The second biggest decline was in Production, which fell 4.4. The Backlog of Orders category was also lower by 2.5. All of these are indicators of future activity. The biggest increase in the report was Inventories, which were up 4.4. Looks like goods are being produced, but are piling up in the warehouse. Together, these components all seem to indicate that U.S. manufacturing will be slowing down later this year.
Manufacturing was the big success story of the stimulus spending that started during the Credit Crisis. This had a greater impact in China than in the Western economies because manufacturing is a greater component of their economy. In the U.S., the service sector is four times bigger than the manufacturing sector, so a buoyant manufacturing sector is not enough by itself to create a strong recovery. This is one reason the American economy remains lackluster despite $3 trillion in budget deficit spending in the last two years. Stimulus spending though will be declining in the U.S. and in the EU into the foreseeable future. We are already seeing what impact that will have based on the PMI reports coming out of China.
Disclosure: No positions.
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