Factory contagion
Across
the world, production lines are shutting down and factory workers’
hours are being cut. A dearth of demand has fallen back on goods
producers, suggesting the global slowdown will not turn around soon.
2
August, 2012
Wednesday
brought news that factory activity either downshifted significantly
or outright contracted in July. The euro-zone factory recession
worsened last month. China posted its weakest official manufacturing
reading since November. Readings from Australia and the U.K. were the
lowest in at least three years. The Institute for Supply Management
said the U.S. factory sector contracted for a second straight month.
The
culprit for manufacturers is falling demand.
Germany,
a factory powerhouse, reported machinery orders fell for a ninth
consecutive month. In Brazil, the orders index dropped for the fourth
month in a row. In the U.S., new orders dropped for a second
consecutive month.
The
problem is that falling demand feeds upon itself. Concerns about the
euro-zone debt crisis and China’s past tightening action to slow
inflation have led consumers and businesses around the world to cut
their spending. Less global demand leaves less work for global
manufacturers who, in turn, order fewer supplies and commodities from
other producers.
Bradley
Holcomb, who oversees the ISM’s survey, suggests future production
trends in the U.S. will be determined by the backlog of unfilled
orders. But the backlog index has already been contracting for four
months running.
The
weak state of factories is boosting expectations of central bank
action. The Federal Reserve ends its two-day policy meeting Wednesday
but economists expect any future action will come later this year.
Hopes are higher for the European Central Bank, which meets Thursday,
but it is unclear what actions policy makers may initiate.
The
problem for the U.S., at least, is that any move by the Fed may do
little do boost demand directly. The rise in stock prices that
usually accompanies quantitative easing may help consumers and
businesses feel wealthier. But unless that euphoria is followed by
increases in actual sales and jobs increase, it won’t last.
Pimco’s
El-Erian Says World In Serious Slowdown
Pacific
Investment Management Co.’s Mohamed El-Erian called recent declines
in purchasing manager indexes in Europe and Asia “frightening”
and said the world economy is suffering its severest slowdown since
the global recession ended in 2009.
3
August, 2012
El-Erian,
who is chief executive officer of the Newport Beach, California-based
Pimco, predicted global growth of 2.25 percent over the next 12
months. That’s down from the 3.9 percent in 2011 and 5.3 percent in
2010 recorded by the International Monetary Fund. The world economy
contracted 0.6 percent in 2009.
“This
is a serious, synchronized slowdown,” El-Erian said in an interview
today.
His
forecast highlights the troubles the global economy is facing as the
euro area struggles to contain its debt crisis and growth in the U.S.
and China slows.
Separate surveys of purchasing managers released
yesterday showed manufacturing in the 17-nation euro area shrinking
by the most in 37 months while Chinese factories teetered on the edge
of contraction.
The
global slowdown is weighing on the U.S. at a time when its economy is
already struggling, El-Erian said. He sees U.S. growth of 1.5 percent
over the next 12 months, dangerously close to what may be considered
“stall speed,” and puts the odds of an American recession at
roughly 25 to 33 percent.
“While
a recession is not my baseline forecast, it certainly is a serious
risk,” said El-Erian, whose firm manages the world’s largest bond
fund.
U.S.
Economy
The
U.S. economy slowed last quarter as consumers curbed their spending
while state and local governments cut back. Gross domestic product
expanded at a 1.5 percent annual rate in the second quarter, down
from 2 percent in the first, according to Commerce Department data.
El-Erian
said he expects the euro area’s economy to contract by 1.5 percent
over the coming year. It grew 1.5 percent in 2011, according to the
Washington-based IMF.
European
Central Bank President Mario Draghi said at a press conference in
Frankfurt today that the region’s economy looks to have stayed weak
in the second quarter and into the third after being essentially flat
in the first three months of the year.
He
told reporters that the central bank may wade forcefully into bond
markets in tandem with Europe’s rescue fund, stepping up its
efforts to fight the area’s financial crisis.
The
euro declined and Spanish bond yields rose on disappointment that
Draghi didn’t signal imminent ECB action.
El-Erian
said that Draghi had good reasons to postpone action. The ECB chief
wants to pressure governments into taking more steps on their own to
resolve the crisis and may want to conserve the central bank’s
limited resources.
Draghi,
though, risks allowing the crisis to worsen by not acting now,
El-Erian suggested.
“When
they act in a month’s time, they will be less effective than if
they acted today,” he said.
He
put the odds of the currency zone breaking apart over the next six
months at 35 percent.
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