Outlook For US And EU Manufacturing Still Gloomy

It is all about confidence. Manufacturing output following a recession will pick up once businesses are convinced that a demand exists (or will do shortly) for their products. They will need to purchase more inventory and hire more staff to meet increased need, but they will not commit to expansion in a climate of uncertainty. The recovery phase from the global financial crisis has been very weak, largely because of continuing uncertainties in the financial sector; sovereign debt concerns; austerity measures and anaemic global demand.

In the USA, two closely watched manufacturing indexes have provided disappointing data for May. The Purchasing Managers’ index (PMI), produced by Markit, showed a small increase for May up to 52.3 from 52.1 in April – a value above 50 suggests expansion. However, the Institute of Supply Management’s Manufacturing Activity Index has fallen to its lowest level since June 2009, slipping from 50.7 in April to 49 last month. The current reading is the first contraction seen for the sector since last November. Some analysts expect US Q2 growth to be weaker as cuts imposed under the Sequester begin to bite and weaker global demand feeds through.

In Europe, manufacturing output in the Eurozone has contracted for the previous 22 months. However, the Eurozone Markit Purchasing Managers’ Index has risen from 46.3 in April to 48.3 for May. This indicates that whilst the sector is still contracting, the rate at which is doing so has eased. The May reading is the highest the index has been in 15 months. Individual results for Eurozone countries show that Germany’s PMI value is at a 3 month high of 49.4. Even Spain and Greece showed improvements in their PMI values with Spain’s value of 48.1 being the best level for two years and Greece’s reading of 45.3 being the highest reading for 23 months – both indicate that manufacturing is still declining, but the rate of decline has eased.