Friday, July 1, 2011

Manufacturing Slowdown is Global

Over the last two months or so, we've seen a variety of US manufacturing indexes show signs of a slowdown. However, the slowdown is not limited to the US

From Bloomberg

Manufacturing growth is slowing in from China to Europe, creating a dilemma for central bankers considering higher interest rates to combat inflation.

China’s factory index fell to the lowest level since February 2009, while in the 17-nation euro area, a gauge slipped to to an 18-month low. German manufacturing expanded at the weakest pace in 17 months, while Italy, Ireland, Spain and Greece contracted.

“There is a broad-based slowdown taking place in the manufacturing sector,” Silvio Peruzzo, an economist at Royal Bank of Scotland Plc in London, said by telephone. “But it’s still too early to jump on the view that we’re heading toward an environment where activity will be contracting.”

Europe’s debt crisis and slowing U.S. growth are damping demand for goods, putting pressure on policy makers to delay further rate increases even as prices gain. Inflation quickened to the fastest pace since 2008 in China, exceeded 20 percent in Vietnam last month and prompted protests in India. Euro-area inflation remained at 2.7 percent in June, exceeding the European Central Bank’s 2 percent ceiling for a seventh month.

Inflation pressures have prompted Asian central banks to be among the quickest to withdraw monetary stimulus as growth accelerated following the global recession in 2009. India, South Korea, Thailand and Taiwan raised their benchmark rates last month to contain rising prices, while China ordered lenders to set aside more cash as reserves.

See also this article from the WSJ

The article highlights the basic global themes we've seen over the last few months.

1.) Inflation is accelerating in emerging economies -- the same economies that are now the engine of global growth. As inflation has accelerated, emerging economy central banks have raised their respective rates. In fact -- we've seen emerging market's bond markets go inverted over the last few months.

2.) Not mentioned in the article -- but of equal importance -- is the effect of the Japanese earthquake, which has negatively impacted a variety of manufacturing issues.

3.) The US appears be hitting a slowdown caused by a lack of consumer confidence. With unemployment still high, job growth weak, gas prices high and political paralysis the standard method of conflict resolution in Washington, consumers appear to be lessening their spending on all but necessities at this point. As this makes up 70% of GDP growth, the overall impact is quite negative.