Thursday, February 9, 2012

Go manufacturing!

One of the most pleasing aspects of the recent run of good activity data has been the recovery in manufacturing Purchasing Managers Indices (PMIs) in just about every country you care to mention. The world PMI has now recovered from a recent low of 49.7 in November last year to 51.2 in January. Remember a reading under 50 suggests manufacturing is contracting while a number over 50 suggests manufacturing is expanding.

A quick trip round the world shows, firstly, a January PMI of 54.1 in America. Importantly the new orders index came in at 57.6. You know the story – today’s new orders are tomorrow’s production. More generally we are looking for exports (along with investment) to be one of the strongest sectors for the American economy in the foreseeable future: the exports index stood at 55 in January.

A strong, even resurgent, US manufacturing sector will be an important part of the US economic rebalancing equation. Manufacturing currently accounts for 10% of the US economy: we expect that proportion to rise over time after many years of decline. It’s also where we expect jobs growth to be strongest. On the downside, it’s also where we expect skills shortages to first become evident.

In Europe the PMI stood at 48.8 in January which is less bad than the recent low of 46.4 in November. That still represents a contraction in manufacturing overall, but the index for Germany blipped back into positive territory at 51. The weakness is still, as you would expect, centred in the periphery.

Nevertheless the improvement in the Europe-wide index was pleasing to see and supports our expectation of a relatively mild recession in Europe. The broader story here is much the same as in America: manufacturing will be a key part of the European recovery story. However Europe starts from a position of relative weakness given poor productivity and high unit labour costs (Germany excepted).

I wrote about the China PMI in a post below so I won’t revisit those points here, other than to reiterate we remain comfortable with our soft landing story in China.