U.S. and Chinese Manufacturing Stabilize, While Europe Lags Behind
Date: Tuesday, April 2, 2019
Source: The Wall Street Journal
Indexes of factory activity suggest an uneven global growth outlook
Manufacturing activity in the world’s two largest economies perked up in March, an antidote to financial-market fears of a coming global recession, though pockets of weakness remain and the outlook is uncertain.
Gauges of the U.S. and Chinese factory sectors stabilized last month from earlier slowdowns, sparking a rally in U.S. stocks after investors had braced for weaker readings. Investors, in turn, sold off supersafe government bonds, sending yields on long-term Treasury bonds above short-term interest rates Monday. That reversed a so-called inverted yield curve that had developed in late March in which short-term rates are higher than long rates, a precursor to economic downturns in the past.
The U.S. Institute for Supply Management said its monthly index of manufacturing activity rose to 55.3 in March from 54.2 the previous month, with new orders particularly buoyant, boding well for U.S. factory output in the coming months. The index is based on whether manufacturing supply managers see activity at their companies expanding or contracting, with numbers above 50 indicating expansion.
“We’ve still got some juice behind us,” said Tim Fiore, who oversees the U.S. survey. “I don’t think things are getting weak based on what I’m seeing here.”
An official purchasing managers index in China rebounded strongly, too, with a pickup in a measure of forward-looking orders. China’s index rose to a six-month high of 50.5 in March from 49.2 in February, well above the forecasts of many economists. Power consumption, steel output and sales of bulldozers all rose.
Though manufacturing activity accounts for a fraction of gross domestic product in the U.S., it is highly cyclical and is seen as a bellwether for the broader economy. The purchasing manager surveys are also timelier than official data, which have been delayed even more than usual this year by the partial government shutdown in December and January.
The Dow Jones Industrial Average closed 329.74 points higher, or 1.3%, to 26258.42, while the yield on 10-year Treasury notes rose 0.08 percentage point to 2.496%. Bond yields rise when prices fall.
“We’re really just seeing growth moderate, consistent with the economy reverting back towards its trend after what was a pretty strong year thanks to fiscal stimulus,” said Sarah House, a senior economist at Wells Fargo. “We’re not seeing [manufacturing] slow dramatically by any means.”
At the same time, data showed Europe’s manufacturing sector lagging far behind in March. The IHS Markit Purchasing Managers’ Index for the eurozone fell to 47.5 in March from 49.3 in February, the biggest fall in output in nearly six years.
Taken together, the purchasing manager indexes are important gauges of the world economy. Global growth has appeared to slow in recent months after a synchronized upturn early last year. Trade tensions hit not only U.S. and China but also businesses in markets that supplied them, including many in Europe.
Policy makers responded by trying to stimulate activity, with authorities in China cutting taxes and lifting spending and the Federal Reserve halting an interest-rate-raising campaign. The European Central Bank also modestly eased monetary policy.
Economists are now watching to see whether those steps clear the way for sustained growth or whether a deeper global downturn is building.
For now, Europe appears to be having the most trouble regaining its footing.
Germany, which relies more heavily on exports to drive growth than many other large economies, saw its PMI fall in March to the lowest level in nearly seven years. Germany’s Mechanical Engineering Industry Association on Monday halved its production forecast for this year to a 1% increase, citing the trade dispute between the U.S. and China.
Over recent decades, Germany has supplied high-end tools and equipment to China and other developing economies as they have beefed up manufacturing capacity.
German auto makers have been grappling with slower demand for cars in China while also facing difficulties at home in upgrading models to comply with new European emissions standards. These difficulties are now percolating down the supply chain, affecting a broad range of smaller suppliers and services companies that depend on the industry.
“It’s going to be a bloodbath for manufacturers in Europe this year, and the first improvement probably won’t come until the second half of 2020,” said Marco Bonometti, chairman of Italian auto supplier OMR Automotive and lobby group Confindustria Lombardia.
In the U.S., the ISM numbers, along with simultaneous reports showing better-than-expected construction spending in February, reassured some economists. JPMorgan revised its running estimate for U.S. gross-domestic-product growth in the first quarter to 2% from 1.5% after Monday’s data.
Timesavers Inc., a Maple Grove, Minn., producer of abrasive finishing machines for the wood- and metalworking industries, said customers were confident about the economy.
“I think we’ll have a better year this year than last year, and things were good last year,” said Peter Wernecke, the company’s digital marketing manager. “People don’t think a recession is coming, and they are moving ahead with their purchases.”
The next key report for the U.S. is Friday, when the Labor Department releases its monthly measures of hiring and unemployment.
The U.S. data weren’t uniformly strong. Consumer spending has been mixed early in 2019. Retail sales, a measure of purchases at stores, restaurants and online, declined a seasonally adjusted 0.2% in February from a month earlier, the Commerce Department said Monday.
IHS Markit’s PMI for the U.S., which is less volatile than the ISM data, retreated to 52.4 in March from 53 in February. That was the lowest level since June 2017, though it remained in expansion.
“I don’t think the tenor is quite as bullish as it was a year ago for consumer sentiment as we see it. Not terrible, but not quite as good as it was,” Liberty Media Corp. CEO Greg Maffei said at a March conference.
And while the yield curve on U.S. Treasurys is no longer inverted, economists said the narrowing spread between long- and short-term yields suggests the nearly 10-year expansion could be approaching an end.
In China, some economists warn that a rebound could be tenuous. Some were skeptical about the higher PMI reading for March, seeing it as part of the normal seasonal recovery that happens after the long Lunar New Year holiday, the dates of which shift from year to year between January and February.
At a building-materials supply center in the south of Beijing, customers were scarce on a recent weekday. He Shengmiao, a sales manager, played with his phone inside his shop, which sells doors, made from aluminum, cedar and other materials, for $100 to $300 apiece. He said he had no clients.
“For us, it’s just getting harder and harder each year. It’s not just the property downturn. It’s everything,” Mr. He said, citing a clampdown on polluting factories, rising costs and “just not enough demand.”