Bloomberg News

Manufacturing Weakens From U.S. to China as Recovery Fades

August 01, 2011

(Updates with U.S. manufacturing report starting in second paragraph, dollar trading in seventh.)

Aug. 1 (Bloomberg) -- Manufacturing indexes from Asia to the U.S. to Europe fell in July as demand weakened and the global recovery from recession lost momentum.

U.K., Russian and Australian manufacturing shrank last month, while the pace of factory growth slowed in Europe and China, according to surveys today. An index of U.S. manufacturing dropped more than economists forecast to a two- year low, even after the dollar’s 7 percent drop against the euro this year.

Europe’s debt crisis, U.S. political haggling over the nation’s debt limit and monetary tightening in China have combined to restrain the global recovery. Consumer confidence is being undermined by job cuts and government austerity measures, while manufacturers may also struggle to recover as soaring commodity prices weigh on margins.

“Manufacturing is slowing and some of these readings are in recessionary territory,” said David Owen, chief European economist at Jefferies International Ltd. in London. “Coming through a banking crisis, you can’t place much weight on the consumer so you depend on manufacturers doing well.”

The U.S. economy expanded less than economists forecast in the second quarter as shoppers retrenched. The Institute for Supply Management’s manufacturing index fell to 50.9 last month from 55.3 in June, lower than the median estimate of 54.5 in a Bloomberg News survey of 80 economists. A measure of new orders fell to 49.2, showing the first contraction since June 2009.

Contractions

The dollar has declined against 15 of 16 currencies tracked by Bloomberg this year, improving U.S. export competitiveness. It has fallen about 5 percent against the yen and the pound and 16 percent against the Swiss franc.

It strengthened against the euro today, to $1.4277 versus the single currency, from $1.4398 on July 29.

In the U.K., a factory gauge by Markit Economics fell to 49.1, the lowest since June 2009, from 51.4, and a measure for Russia slipped to 49.8 from 50.6. Australia’s index slid to a two-year low of 43.4 from 52.9. Readings below 50 indicate contraction.

Europe’s index of manufacturing growth cooled to 50.4, the slowest pace in 22 months, from 52 in June. China’s purchasing manufacturing index moderated to 50.7 from 50.9, the China Federation of Logistics and Purchasing said, as the faltering recovery in the U.S. and Europe limited demand for goods from the world’s second-largest economy.

Margin Pressure

Volkswagen AG, Europe’s largest automaker, said July 28 rising commodity prices and a strengthening euro will damp earnings gains this year after reporting lower-than-expected second-quarter profit. Schneider Electric SA, the world’s biggest maker of low- and medium-voltage equipment, a day later pared its full-year margin target after reporting lower-than- estimated earnings because of raw-material inflation.

In Europe, “the optimistic interpretation is that the slowdown still reflects temporary factors” such as debt crises and the Japanese earthquake, Jens Sondergaard, senior economist at Nomura International Plc in London, said in a note to clients. “A more pessimistic interpretation is that today’s numbers are the first signs that the near-term economic outlook is significantly worse than our central case.”

Fiscal Squeeze

Markit’s composite index of European manufacturing and services, published on July 21, fell to 50.8 in July, the lowest in almost two years, signaling the economic recovery is losing momentum. Governments from Greece to Spain have pledged austerity measures to defend credit ratings and contain borrowing costs as they tackle rising deficits. That’s undermining sentiment among consumers at the same time as companies continue to cut jobs.

HSBC Holdings Plc, Europe’s largest bank, said today it plans to cut 30,000 jobs by the end of 2013, about 10 percent of the total, to stem rising costs.

The U.S. is set to reach the limit of its ability to borrow tomorrow after recording the worst growth performance since the start of the recovery in June 2009, according to data published July 29. Congressional leaders agreed on a deal late yesterday to raise the country’s $14.3 trillion debt limit and slash government spending.

The economy expanded at a 1.3 percent annual rate in the second quarter after growing 0.4 percent in the previous three months. While consumer spending rose just 0.1 percent, exports were one of the economy’s bright spots, increasing 6 percent. Dow Chemical Co., the largest U.S. chemical maker, said on July 27 that demand is “strong” in markets abroad.

Global economic growth is also being hampered by rising commodity prices. Oil prices have risen as much as 40 percent in the past year, while wheat costs are up as much as 35 percent.

The data today present “the most worrying scenario for manufacturers,” said Karen Ward, senior global economist at HSBC Holdings Plc in London. “Global commodity prices are placing pressure on consumers and companies. The bright spots are pretty few and far between.”

--Editors: Fergal O’Brien, Craig Stirling

-0- Aug/01/2011 10:53 GMT

-0- Aug/01/2011 10:55 GMT

To contact the reporter on this story: Jennifer Ryan in London at jryan13@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net


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