Wednesday, May 2, 2012

Manufacturing PMI's

The recent release of the major global manufacturing PMI’s we monitor were all broadly consistent with our view of the world.

In America the PMI was one of those results you occasionally get to anoint as “unambiguously strong”.  The overall index rose to 54.8 in April, up from 53.4 in March.  But it was the rise in the important sub-indices that was especially pleasing with production rising to 61.0 (from 58.3 in March), new orders 58.2 (54.5), exports 59.0 (54.0) and employment 57.3 (56.1).  The inventories index fell to 48.5 from 50.0, alleviating some of our inventory concerns in the recent GDP data (see post below).   The prices paid index was stable at 61.0, telling us that while price pressures are strong, they have not got worse.  That’s good news from both an inflation and manufacturing sector profitability perspective.

As you will recall export (and therefore manufacturing sector) growth is a key part of our US growth story.  The combination of new orders and lower inventories is positive for future production, at least in the near term.  One note of caution is the extent to which recent better weather has seen some activity “borrowed” from future quarters.  That would likely lead to a drop in activity in the next few months, but at this point we can say the June quarter is off to a good start.

In China the official PMI consolidated at 53.3 in April, up slightly on the 53.1 recorded in March.  Also the gap closed between that and the HSBC index with the latter measure coming in at 49.3, marginally stronger than the flash estimate of 49.1 and the first rise in that index since February.  The key difference between the two indices is coverage, with the HSBC index focussing on smaller private companies while the official index focuses on larger and state owned enterprises.

This result along with other recent data such as lending and money supply growth supports our view that the Chinese economy reached the bottom of the current cycle in the March quarter.  From 8.1% GDP growth in the year to March 2012, we expect growth to recover to around 8.5% by the end of the calendar year.  That assumes authorities continue to reduce the reserve requirement ratio and to follow through with budget commitments on infrastructure and social housing.

In Europe the recession is clearly not over with the combined headwinds of fiscal consolidation and bank deleveraging continuing to impact on activity.  The Europe-wide manufacturing PMI fell from 47.4 in March to 46.0 in April, supporting our view that Europe will remain in recession through to mid-year at least.