Wednesday, April 4, 2012

Manufacturing data consistent with our view of the world

The regular monthly flurry of manufacturing PMI indices from around the world hasn't changed our view of what's going on in the world. They are broadly consistent with our story of subdued recovery in America, mild recession in Europe and soft landing in China.

In America the PMI rose to 53.4 in March from 52.4 in February. The strength in production (58.3) and employment (56.1) were especially pleasing. The employment index is at its highest level since June last year and is consistent with other recent employment data. The export index came back a bit but is still reasonably robust at 54.

There is nothing in this result to shift us from our expectation of 2% GDP growth in the US this year. We see the recent better activity data as improving the balance of risks around that forecast.

In Europe the March index fell to 47.7 from 49.0 in February. Our view on Europe is that while we think they have avoided a deep recession, the mild recession that began with the contraction in December quarter GDP will continue to mid-year. This result is consistent with other weak data such as the recent rise in the unemployment rate to 10.8%.

The surprise result was the strength in the China official PMI index which rose to 53.1 in March from 51.0 in February. At least part of this rise appears likely to be due to seasonal factors.

The rise in the official index is inconsistent with the previously released HSBC index which recorded a level of 48.3, under the 50 benchmark. The indices have different coverage with the HSBC index capturing smaller factories while the official index captures the larger SOEs. It is not unusual for these indices to diverge.

The stronger read of the official index supports the soft landing story and that the March quarter may be the weak point in the cycle. However, we are not reading too much into one surprise reading, especially with other contradictory data. We continue to believe that further easing in monetary and fiscal settings will be required before we can be confident of a turnaround in growth prospects in China.