Tuesday, June 24, 2014

June "flash" PMIs

“Flash” estimates of manufacturing PMIs for June paint a picture of stabilization in China and Japan, a strong second quarter recovery in growth in the US following the weak first quarter and a Eurozone economy that appears to be losing momentum.

The US index climbed to 57.5 in June, up from the 56.4 recorded in May.  This is consistent with other activity data suggesting the economy is bouncing back strong from the growth contraction in the first quarter (which appears likely to be revised down again later this week to an annualised -2.0% on the back of weaker trade and services data).  Of the major economies, the US continues to have the strongest growth momentum.

Then China index rose to 50.8, a seven-month high.  Improvement in the sub-indices was broad-based.  In particular the new-orders sub-index rose to 51.8 (from 50.0) with the new export orders index rising a smaller amount.  That tells us the improvement is coming through on the domestic side of the economy reflecting increased infrastructure spending and other policy tweaks to support domestic demand.  I still think Q2 GDP slips further to around 7.2% but fears of a dip below 7.0% appear increasingly overdone.

In Japan the index continued the recovery from the post-tax hike decline.  The index rose from 49.9 in May to 51.1 in June.  The critical question here is how the economy tracks in the second half of the year after the widely expected contraction in the second quarter.  While this latest index tells us to expect a return to growth, at this point I think that growth will be modest at best.

The concern is again the Eurozone.  The manufacturing index dipped lower from 52.2 in May to 51.9 in June while the more widely watched composite index (manufacturing and services) fell from 53.5 to 52.8.  That suggests caution is required before expecting any meaningful pickup in growth from the current low trajectory.  That said there remain strong divergences in performance across the region.  The strongest growth momentum is coming from the periphery while France continues to cause most concern.