Global Manufacturing Moves to the Slow Lane

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. The manufacturing sector and housing are two big drivers of the economy. I'm here with Bob Johnson, our director of economic analysis, for an update on both of them.

Bob, thanks for joining me.

Bob Johnson: Great to be here today.

Glaser: Let's start with global manufacturing. We had some new data this week, the Purchasing Managers' Index. Can you give us a little bit of color on what the global-manufacturing picture looks like?

Johnson: Sure. We got, as you said, the global-market data on purchasing managers. So, this is their flash report, the quick one. It gets adjusted later at the end of the month, but what we saw basically was a relatively slowing world-manufacturing economy. All three of the major manufacturing areas--China, Europe, the United States--all saw down readings compared with the prior month. The U.S. and Europe were still kind of in a growth mode--that is, they were over 50. More than half of the firms out there were seeing improvement versus those seeing declines, so that was certainly good news. China, on the other hand, for the second month in a row, was below that closely watched 50-mark, with more firms reporting declines in advances.

Glaser: So, what's driving this slowdown?

Johnson: I think there were a number of issues going on--and it may be a little different by economy--but certainly, I think number one is the slowdown in commodities in general, as well as a slower Chinese economy overall. Certainly, a lot of manufacturing equipment was involved in mining equipment, whether it be for coal or for iron ore or processing all of those commodities and the conveyor belts and all the stuff that you do. And certainly, oil is another commodity that's weakened, and certainly we found out how much oilfield equipment is involved in manufacturing.

So, that has held back the growth, too, and I think those are the key drivers of why we haven't been as strong. Offsetting that a little bit in Europe, we've had QE and their economies are becoming a little bit more active. So, the European PMI number shrank less than the other countries. So, that was certainly some indication that the QE programs there are probably working, and we've seen a couple of forecasters boost their growth rates and GDP estimates for Europe. I think that's consistent with what we saw in today's PMI numbers.

On the other hand, China is still quite weak, and there is some thought that maybe they'll have to do more easing based on today's softer manufacturing number. Everybody had kind of hoped it would be back over 50 again with this flash reading for April. The logic being that the Lunar New Year is over; maybe some of the port stuff hadn't begun to clear out and stuff could pour into the U.S. again. But it wasn't in the numbers.

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Glaser: It does seem like we're in a situation where bad news is good news for Chinese stocks often. Is there really a room for the socialist government to have more stimulus or do you think that they are kind of reaching the end of effective programs at least?

Johnson: Well, they keep trying. And they're trying not to do one of the really big, massive, countrywide everything-goes initiatives that they had in the 2008-10 period that kept them out of a major recession unlike the U.S. situation. But right now, they're just kind of making little moves on the margin. They've adjusted the reserve requirement, which is the latest thing they did.

They eased lending requirements on second homes. They brought an interest rate down here or there. So, they have taken a number of measures. They haven't really pulled out the Big Kahuna--the big gun, if you will. They are not initiating some new government spending program or some new big rail program or some big new industry initiative or highway-building thing. That could at all yet come. So, there's a lot more they could do. The question is will they do it? Do they want to upset this whole movement toward a consumer-oriented economy? Do they want to move back to this economy of fixed investment at all cost, which has environmental costs associated with it?

Glaser: We are seeing a slowdown in manufacturing, but are there any signs, at least in the U.S., that an improving housing market will help pick up some of that slack?

Johnson: Theoretically, that's exactly what we are hoping for. Last year was very strong because of energy and autos in the U.S. Those industries will not do as well this year. And we had hoped that housing might offset some of that, but we're off to kind of a slow start on the data for housing so far. January and February were not very good months for the housing industry. The March data that came in this week is a little bit mixed. Existing-home sales did great. They were almost up at 15.2 million annualized units sold. That would be one of the highest levels of the recovery, and up about 6% from year-ago levels. So, we clearly have seen a little bit of a pick-up there in existing homes.

The new-home sales data was a little bit more mixed today, but we're actually, on a year-over-year average basis, still up 20%. A lot of people are focusing on the month-to-month numbers. We had January and February both above 500,000 annualized units, and we dipped to about 490,000 in March. No reason to panic. I think that January and February were probably unusually strong, and I think you're always in dangerous territory using number sequentially.

The year-over-year growth rate of 20%, I think, is more indicative of the state of the new-home market, which has gotten better as we get a little bit more of a focus on lower-end homes. Recall that it has been very hard for first-time buyers in the new-home market because they're so expensive relative to an existing home. And we heard this week that the homebuilders that are more focused on the bottom of the market are beginning to do a little better than those at the high end of the market.

Glaser: Bob, thanks for your take on these markets today.

Johnson: Thank you.

Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.