The slowdown in the world economy is catching up with American manufacturers.
A key gauge of factory production in June dropped to its weakest level since the summer of 2009, when the American economy was just beginning to emerge from a deep recession.
Monday’s purchasing managers’ index (PMI), which is based on a survey of purchasing and supply managers from across the U.S., registered a reading of 49.7 per cent for June, down from 53.5 per cent in May.
The number is significant because any reading below 50 indicates the factory sector is contracting.
Manufacturing has been a pillar of the U.S. economic recovery to date, surprising some analysts and helping to bring down the unemployment rate from a high of 10 per cent to the current 8.2 per cent.
One month’s reading on the PMI does not mean that U.S. factories are in another downward spiral.
But there are growing signs that some U.S. manufacturers are beginning to feel the stress of Europe’s troubles and a softer economy in some of the world’s faster-growing regions.
Ford Motor Co., for instance, said in a regulatory filing last week that it expects profits will be “substantially” lower in the second quarter from the same period a year ago.
The company said losses in Asia, South America and Europe could be as much as three times greater than the $190-million pretax loss recorded by those operations in the first quarter. It cited weaker demand from Europe as a key factor, saying that profit margins in the region were falling.
On its own, June’s manufacturing weakness in unlikely to lead to a response from policy makers. But it could be the beginning of a longer trend that will trigger a new round of quantitative easing from the Federal Reserve, said Ethan Harris of Merrill Lynch. Quantitative easing is a policy in which the central bank creates new money and attempts to drive down interest rates by purchasing government securities.
The “plunge” in the PMI from May is especially worrisome given that the new orders index, the most forward-looking element of the PMI, fell to 47.8 per cent in June from 60.1 per cent a month earlier, said Paul Dales, a senior U.S. economist at Capital Economics.
“This is the biggest sign yet that the U.S. is catching the slowdown that is well under way in Europe and China,” Mr. Dales said.
In China, gross domestic product growth is expected to slip markedly in 2012 to 7.9 per cent from 10.3 per cent in 2010, according to economists at Toronto-Dominion Bank. But North American manufacturers with European exposure may be the worst off.
TD economists predict the euro zone economies as a whole will shrink 0.4 per cent in 2012, following relatively flat growth in 2011 and 2010. The unemployment rate in the euro zone now sits at 11.1 per cent in May, the highest since the currency union was formed.
The ensuing declines in demand for consumer products and other goods indicate a bleak picture for American manufacturers.
With the exception of Central and Eastern Europe, Nike Inc.’s sales also slowed in all regions in its most recent fiscal quarter. Revenue in Western Europe, the epicentre of the euro crisis, grew a mere 2 per cent in the quarter ended May 31, compared with 4 per cent in the previous quarter. The company’s revenue growth in China slowed to 18 per cent from 25; in other emerging markets, growth eased to 16 per cent from 23.
“We have more inventory than we’d like in China and Western Europe,” Don Blair, Nike’s chief financial officer, said on conference call with analysts last week.
Weak U.S. manufacturing data doesn’t yet indicate an approaching recession, said Tom Porcelli, Royal Bank of Canada’s New York-based chief U.S. economist, but he is warning clients to be wary of a serious slowdown.
“Economic activity is slowing down and slowing down in earnest,” he said.
But Mr. Porcelli said it’s wrong to use Europe as a “scapegoat” for the weakness in manufacturing. The “fractures in the foundation of the U.S. economy,” such as declining profits, slower productivity growth and an elevated unemployment rate, are just as important, he said.