Factory-Sector Gains Signal Global Recovery
The U.S., Asia and Europe made gains in manufacturing this summer, according to data released Tuesday that signal the global economy may grow faster for the remainder of the year than once expected.
In the U.S., the manufacturing sector grew for the first time since January 2008; the key gauge of this, the Institute for Supply Managements manufacturing index, rose to 52.9 from 48.9 the previous month, driven by improvements in new orders and production. Levels above 50 indicate growth. Meanwhile, the purchasing managers index for China swung into expansionary territory in March -- well before other nations -- and has stayed there ever since, but Tuesdays reading of 54.0 for August show activity expanded at its fastest pace in more than a year. And Japanese industrial output rose 1.9% in July, beating expectations.
The positive signs come on the heels of another report Tuesday showing similar strength in Europe. Though still contracting, the euro-zone manufacturing purchasing manager index rose to 48.2 in August from 46.3 in July, a 14-month high. The improvement came on the back of gains in Germany and France, but Spain and Italy posted declines. The U.K. showed unexpected weakness, as the nations manufacturing sector shifted into contractionary territory. Augusts reading came in at 49.7 from 50.2 a month earlier.
Economists and public policy officials credit massive global stimulus efforts with helping lead the march out of the deep recession. Now, they say, private demand must replace the boost to the global economy from the governments monetary and fiscal expansion.
Another big question haunting the global economy now is whether inflation will unexpectedly climb and push the world again into recession, said Mr. Suttle. Others factors that could affect both the strength and length of global growth are unemployment and consumers reticence to spend.
Still, the August improvement in the U.S. is notable because many of the industries that improved arent linked to automotive production. That signals an improvement in demand apart from the Cash for Clunkers program, which let people trade vehicles in for a credit toward more fuel-efficient models, helping boost consumer spending and manufacturing.
International Rectifier Corp., which manufactures power semiconductors, said demand and growth were particularly strong in China and Taiwan and the company noted encouraging signs of stabilization in North America, in its earnings call last week. Europe and Japan were still hindered by challenges in the industrial automotive sector.
New orders were a driving force behind the manufacturing gains in the U.S., rising almost 10 percentage points to 64.9. Production and supplier deliveries, which tend to be tied to improvements in new orders, also rose.
In the midst of all the good news, hiring was still a weak spot in the U.S. manufacturing report. The index shows that employment was still contracting and some companies noted in their comments that layoffs were still ahead. Separate indicators released Tuesday showed mixed signs for the construction industry. The National Association of Realtors pending home sales index rose to 97.6 in July from 94.6 in June. But construction spending fell 0.2% in July to a seasonally adjusted annual rate of more than $958 billion compared to the prior month, the Commerce Department said.
With hiring still struggling and housing working toward stabilization, healthier foreign economies could buoy the U.S. recovery. The manufacturing reports exports index climbed five percentage points to 55.5 in August.
China has pulled out of the global slump faster and more decisively than any other major economy, thanks to its enormous stimulus program. Now it grapples with a new set of worries that other economies will also have to face when they manage a return to growth. Having shown that the government can force through a short-term recovery, Chinese policymakers now face the challenge of sustaining an expansion over the longer term even while withdrawing official support.
The continued strength of the purchasing managers index is a sign that Chinas economy still has momentum, after its gross domestic product surged an annualized 14.9% in the second quarter, according to a central bank estimate. Chinese demand has boosted machinery exports from Germany and Korea, and has been a particular boon to commodity producers like Brazil and Australia.
With considerable economic policy stimulus in train around the world, the global economy is resuming growth, Australias central bank governor, Glenn Stevens, said in a statement Tuesday. The major economies appear to be approaching a turning point, he said, crediting very strong growth in China for aiding an expansion throughout Asia. The large economies of India and Indonesia have maintained relatively steady growth this year, but even export-dependent Hong Kong and Singapore rebounded in the second quarter.
Chinas growth came close to a standstill in the fourth quarter of 2008, but the manufacturing sector has come well back from those depths. Activity has been boosted by a nearly unprecedented wave of lending from state banks coupled with a rapid public-investment program. A government survey of industrial firms last December found 15% had wholly or partially stopped producing; the latest official update, which looked at 170,000 factories, found that proportion had shrunk to 7.2% in June.
Government spending has led the way this year, but there are signs corporate investment is picking up as well. BOE Technology Group Co. and a consortium of other Chinese state-owned enterprises said last week they will spend $4.1 billion to build a major new liquid-crystal-display factory in Beijing. Yet investments from non-state companies have lagged, and the government admits the recovery wont be on solid ground until private-sector spending takes over the lead.
Confidence remains fragile, and some of the initial euphoria over the stimulus has already evaporated. Despite continued reassurances from the government, the Shanghai stock market declined 23% in August as investors fretted over a slowdown in the pace of bank lending. Premier Wen Jiabao on Tuesday again reiterated, in a meeting with World Bank President Robert Zoellick, that the governments economic policies wont change direction. Beijing still faces the difficult task of managing liquidity conditions to avoid a bubble -- or a bust, said Brian Jackson, an economist for Royal Bank of Canada.
The biggest boost from the governments massive fiscal and monetary stimulus is probably over: most economists expect Chinas GDP growth to slow to an annualized pace of 9% to 10% in the second half of this year. Chinese firms appear to have started restocking inventories earlier than companies elsewhere in the world, economists say. So while inventory building will likely help growth in the U.S. and Europe in the rest of 2009, its unlikely to do much more to boost Chinas figures.
Still, Chinas stimulus now seems to be more than strong enough to meet the official target of an 8% expansion for 2009. Officials are still publicly cautious about the world economy, with exports still down 22% from last year, and have repeatedly said the policy to support growth hasnt changed. But government statements in recent weeks have focused more on longer-term issues like funding for small businesses and controlling excess capacity. Thats where economists are looking for new measures that would help keep the recovery going into 2010.