Thursday, December 2, 2010

US and China Manufacturing

After the stellar result in October, it was not surprising to see some pull back in the Institute of Supply Management's US Performance of Manufacturing Index in November. The October reading of 56.6 was 0.3 percentage points below Novembers 56.9. For an economy that is only meant to be "muddling through" the second half of 2010 and early 2011, the US seems to be muddling through pretty well at this stage.

Most of the sub-indicies that drove the increase in October reversed to various extents in November. In particular the Production index fell to 55.0 from 62.7, New Orders fell from 58.9 to 56.6, and Exports fell from 60.5 to 57.0.

The overall index really only managed to hold up so well on the back of increases in the Inventories index (from 53.9 to 56.7) and the Supplier Deliveries index (from 51.2 to 57.2). These indices are two of the least forward looking of the sub-indicies.

This result does not change our "muddle through" scenario for the US economy over the next few months. Pick your favourite sub-index and the data is consistent with GDP growth of anything between 2% and 3.5%. We are increasingly confident the US avoids the dreaded double-dip scenario, but growth over the next few months is going to remain patchy and subdued.

Meanwhile in China, both PMI indicies rose in November. The official index rose from 54.7 to 55.2 while the Markit index rose from 54.8 to 55.3. This tells us that despite the slowdown in annual growth over recent months, underlying activity remains strong. In particular, forward orders are strong which bodes well for future production. Even better, the new orders appear to be largely domestic activity - which is good for global rebalancing.

Data like this makes us more confident that growth in China is sufficiently strong for the authoirities to continue their fight against inflation and strong housing market activity without seriously dampening the growth outlook.