The US manufacturing ISM fell to 51.3 in March, down from 54.2 in February. Much of the strength in the index in the first two months of the year reflects firms restocking efforts post the cautious approach to inventory management in the midst of the fiscal cliff uncertainty in late 2012. Some pull-back was therefore not entirely unexpected. This result supports our view that March 2013 quarter GDP growth will come in relatively strong at 2.5% (seasonally adjusted annual rate), but that result needs to be considered in conjunction with the soft December 2012 quarter increase of 0.4%. An average increase of 1.5% seems closer to the true state of play. Indeed that’s the increase we have pencilled in for the June 2013 quarter when the effect of the fiscal drag of higher taxes and lower spending will become more evident. We expect stronger growth in the second half of the year as the fiscal drag effect wanes and as the improvement in the housing market provides some stronger momentum. Amongst the detail of the result the new orders index fell to 51.4 (from 57.8), employment rose to 54.2 (52.6). The most positive news in the result was the increase in the export orders index to 56.0 (53.5). Remember, stronger exports and business investment will be a critical part of a stronger (rebalanced) US economy.
The Euro zone PMI fell 1.1 points in March to 46.8, however that’s still some 3 points higher than the low point reached in the middle of last year. The most concerning aspect of the result was the fall in the new orders index from 47.9 to 45.3. Also disappointing was the decline in the PMI indices for both Germany and Ireland, the two countries I had expected to perform relatively well (in Euro zone terms!) this year on the back of higher exports. We will have to wait and see. The French index is languishing at 44.0, indicative of ongoing recession. The Italian and Spanish indices fell to 44.5 and 44.2 respectively. No real surprise there. Recall I recently revised my 2013 GDP forecast down from a small positive to zero. That assumes a further contraction in GDP in the first half of the year followed by a modest recovery in the second half of the year, led by the countries that have exports as a greater proportion of GDP and, in the case of Ireland, will benefit from recent gains in competitiveness. Outside the Euro zone it was good to see a recovery in the UK PMI over the month, although it is still down on the January level, indicating a weakening in manufacturing conditions over the quarter.
The China manufacturing PMI put in a modest increase to 50.9 in March, up from 50.1 in February. This is the first PMI reading clear of the volatility around the Lunar New Year holidays. Importantly the production and new orders indices put in healthy increases with the production index rising 1.5 points to 52.7 and new orders up 2.2 points to 52.3. It was also good to see an improvement in the employment index which has been sitting in contractionary territory since the middle of last year – the index rose 2.1 points to 49.8. The export index orders rose to 50.9, although that’s still not strong enough to justify the 23.6% rise in exports in January/February, so we still export that growth rate to come off over the next couple of months. That’s supported by the still low import reading of 48.9. Remember China exports have a high import component. The purchasing price index fell a significant 4.9 points to 50.6 in March, indicating not pricing pressure, at least at the producer level. That supports our view of no change in monetary conditions this year. Overall the result is consistent with a further increase in GDP growth this year which we see peaking at around 8.5% in the third quarter.
Japan showed promising signs with its manufacturing PMI rising above the 50 benchmark for the first time since May 2012. This was largely down to the stimulatory effect on exports from a weaker Yen as well as commitment by the authorities to greater fiscal and monetary stimulus.
Among the key emerging markets, Brazil slipped further as economic conditions remained challenging. Russia was off slightly, but still in expansionary territory. India also slowed as power outages impacted on manufacturing, while recent monetary policy easing is yet to fully flow through to demand. South Korea managed to improve as growth in global demand offset the strength in the Korean Won.