2nd May 2012
The Institute of Supply Management
The PMI (Purchasing Manager’s Index) registered 54.8 percent, an increase of 1.4 percentage points from March’s reading of 53.4 percent, indicating expansion in the manufacturing sector for the 33rd consecutive month.
So if we recall that 50 is the benchmark between expansion and contraction we see that this is a strong report. If we look into the detail we see that it is backed up by strong components too. For example New Orders rose by 3.7 to 58.2 and Exports rose by 5 to 59. The US central bank the Federal Reserve will be particularly pleased to see that the Employment index improved by 1.2 to 57.3 as the employment/unemployment situation is its major concern right now.
The only factor which stopped this representing a complete very early Christmas wish list for the US economy was the fact that the Price Index remained strong at 61. Indeed 34 commodity prices were recorded as rising and only 2 recorded as falling.
ISM were so bullish about their own report that they announced this relationship between their figures and the likely outcome for the US economy.
The past relationship between the PMI and the overall economy indicates that the average PMI for January through April (53.7 percent) corresponds to a 3.8 percent increase in real gross domestic product (GDP). In addition, if the PMI for April (54.8 percent) is annualized, it corresponds to a 4.1 percent increase in real GDP annually.
If the US economy does grow at 4.1% or even 3.8% then she will be in the rare situation of a Western economy starting to grow at a rate which will allow her to escape the chains of the credit crunch era which have held so much of us down. However I counsel caution at this point as these days manufacturing sectors are not the bellweather of economies that they used to be and the service sector represents a much larger component. If it were that simple then ISM’s 55.8 reading back in June 2011 would have meant that she was already saved!
However it was a good and hopeful sign and the US equity market took it on board as the Dow Jones Industrial Average closed at a four-year high of 13,279. Indeed it too has diverged from other Western equity markets recently as it has put in a better performance. So American readers are probably smiling on several fronts today!
The Euro zone’s manufacturing shrinks again
If we take a look at the Euro zones nearest equivalent to the ISM report we saw this today.
The Eurozone manufacturing downturn took a further turn for the worse in April. The seasonally adjusted Markit Eurozone Manufacturing PMI fell to a near three-year low of 45.9, down from 47.7 in March and below the earlier flash estimate of 46.0. The headline PMI has signalled contraction in each of the past nine months.
So there you have it. If we ignore the somewhat spurious accuracy of recording these numbers to decimal points and look at the trends we see this. Manufacturing in the Euro zone has shrunk for nine months in a row whilst manufacturing in the United States has grown for 33 months in a row. It would be hard for it to be more contrasting!
If you wish to see growth in the Euro zone then you have to look to Austria (51.2) and Ireland (50.1) who were the only countries to record figures above 50. And yes that does mean that the German locomotive has hit the buffers.
Germany started the second quarter of 2012 with its worst manufacturing performance for almost three years, as another month of weaker order inflows finally brought production levels back into contraction.
The reading here was 46.2 which compares very disappointingly with the long-run average of 52.2. And there may be some schadenfraude to be gained here if you are so minded.
A number of manufacturers cited weaker demand from clients in Southern Europe as the main reason for falling export orders at their plants.
Still now Germany’s economy appears to be suffering the European Central Bank may be willing to help more.
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