Tuesday, June 4, 2013

US and China PMIs both surprise

The US and (official) China May PMIs surprised on the downside and upside respectively.  We have been surprised by the resilience of the US data in the last few weeks in what should be the weakest quarter of the year for growth.  In that respect the May PMI didn’t disappoint.  Meanwhile in China, their May PMI is the first good bit of news we have had in a while, supporting our story of a modest cyclical rebound.

In the US the manufacturing PMI fell to 49.0 in May, down from 50.7 in April.  Average market expectations had been expecting a rise to 51.0.  Some of the regional manufacturing surveys had been weak recently, so this result is not inconsistent with the messages from around the country.

All the major sub-indices were weaker in the month with production, new orders, exports and imports all lower.  The employment index was also softer but only a tad, coming in at 50.1 from 50.2 in April.  Inventories bucked the trend with a rise after falling in each of the last three months, but rising inventories itself a sign of weakness and perhaps a precursor to some softer activity data ahead.

As I said at the start, that’s not inconsistent with our view that the June quarter would be the weakest quarter of the year.  The March quarter benefitted from the postponement of activity at the end of last year on the back of the fiscal cliff uncertainty and super storm Sandy.  The June quarter was going to be the period in which the full force of fiscal drag would make itself known: we expect annualised growth of 1.5% in the June quarter, down from the 2.4% recorded in the March quarter.  We continue to expect a stronger second half of the year as the effect of fiscal drag wanes and as the housing recovery continues.

In China the official PMI for May came in at 50.8, a slight improvement in the 50.6 recorded for April and better than average market expectations of a decline to 50.0.  The improvement in the official PMI contrasts with the trend decline in the HSBC PMI that dipped down to 49.2 in May.  Remember the official PMI captures large enterprises (SOEs) while the HSBC index captures smaller enterprises.

The production index was the major mover, rising from 52.6 in April to 53.3 in May.  The new orders index move was more subdued rising from 51.7 to 51.8 over the month, while new export orders rose from 48.6 to 49.4.  On the other hand, inventories of finished goods rose from 47.7 to 48.6.  As with the US, rising inventories is not a sign of strength.  On that note the employment index also slipped slightly.  The other notable component was the purchase price index which rebounded from 40.1 to 45.1 over the month, indicative of some normalisation of input prices.

The best news was the rise in the import index, which rose from 48.7 to 50.3.  This index has been below 50 since April 2012.  Whether this is export (China exports have a high imported component) or domestic demand related remains to be seen, but we’ll take it either way.  While it’s dangerous to read too much into one monthly PMI, this result makes me more comfortable with my expectation that annual China GDP growth will be higher in the year to June than it was in the year to March.