Global manufacturing PMI (Purchasing Managers Index) data published today shows further contraction in manufacturing sectors in China and the United States.
China’s official manufacturing PMI for January drops to 49.4 from 49.7 in December, failed to meet the 49.6 expectation. It is the sixth consecutive month for China’s manufacturing PMI to fall below 50, indicating deteriorating economic health.
The National Bureau of Statistics of China explains in the report that manufacturing activities usually decline during the New Year and the Chinese New Year based on historical data, which might be a reason for the lower PMI. Also, companies are voluntarily reducing production and inventory to combat the excessive production capacity problem that China has been suffering from. Chairman Xi Jinping’s new ‘Supply-side Structural Reform’ aims at solving this problem by undertaking measures such as stimulating businesses through tax cuts, encouraging innovation and entrepreneurship, optimizing production and improving the quality of goods and services and lowering prices, in order to eventually stimulate the demand. Results of the supply-side reform are yet to be seen from economic indicators.
US manufacturing PMI reported by ISM for January is 48.2, the third month below 50. While the number shows modest improvement with an increase by 0.2 point from December, it misses the expectation by 0.4 point. Although the US economy has been considered robust with steady unemployment rate, the manufacturing sector is exposed to risks with the volatile commodity markets, depressed oil prices, as well as continued dollar appreciation.
Positive indicators can be found in Europe. Although the index for the Euro Zone remains unchanged from the previous month, major economies such as Spain offer surprises.
Manufacturing PMI for Spain in January lifted up from 53 to 55.4, surpassing analysts’ expectation by 2.9 points. As the fourth largest economy in the Euro Zone, Spain has been suffering from a high unemployment rate (22.06% on average in 2015) during the recession. The Spanish jobless rate in Q4 of 2015 dropped to the lowest since 2011, and retail sales improved by 3.6% in 2015, the largest increase in 15 years. Both numbers suggest that economic recovery starts to deliver results.
The Index for the UK also shows an increase by 1.1 points, exceeding estimates. France goes in line with expectation, but with a decline of 1.4 points from the previous month. Germany surpasses estimates, despite a decline of 0.9 point. As the backbone of the European economy in previous years, Germany is now slowing down due to the weakening Chinese economy which affects export-based industries such as the automobile industry. In January, the European Central Bank has hinted new stimulus to be provided in March.
The PMI, Purchasing Managers Index, is a key indicator for economic health, provided on a monthly basis. Manufacturing PMI is composed of five measurement indices: new orders, output, employment, suppliers' delivery times and stocks of purchases. A manufacturing PMI of more than 50 indicates an expansion in the manufacturing sector and favorable economic conditions. A PMI lower than 50 shows contraction and weakening economy.