The global manufacturing cycle seems to have peaked in early 2014 as ISM/PMIs for the US, China and the euro area have all started the year on a weak note. In China, Flash PMI manufacturing for February dropped for the third consecutive month to 48.3 in February from 49.5 in January (see Flash Comment China: HSBC PMI dropped markedly in February, 20 February 2014). Adding to the softer picture this week was a slight disappointment in euro Flash PMI, which fell back to 53.0 in February following a strong reading in January.
What was slightly at odds with this development was the sharp rise in US Markit PMI for February which jumped higher, throwing in more uncertainty about the true state of the US economy. However, for now, this number is the outlier as almost all other indicators point to a weakening of the US economy in recent months.
What should we make of these signals? We believe we are seeing a temporary dent in the global manufacturing cycle as Chinese tightening has slowed Chinese investment spending and some of the temporary boosts to the US are fading and will dampen US growth for a while (see Strategy: Weaker US growth leaves risk assets vulnerable, 14 February 2014). The adverse US weather has clearly added to this picture and made it difficult to see how much of the US weakness is real and how much is due to weather.
Generally, G3 PMI correlates quite well with G3 private consumption. Following a strong rebound in H2 13, consumers seem to have lost some steam towards the end of the year. Retail sales in both the US and the euro area finished 2013 on a weak note and in January, US sales took another hit from the freezing temperatures and snow storms. As inventories have been building in both the US and euro area in recent quarters, the weaker demand is likely to result in a temporary softening in the global manufacturing production cycle.
There are also increasing signs that the US housing recovery is hitting a soft patch as a result of the rise in mortgage rates in 2013. While the weather has added to the housing weakness, there are also clear signs of a real slowdown in US housing. This is evident from weaker sales expectations, declining mortgage applications, a decline in housing permits and the banks reporting lower demand for mortgage lending (see Flash Comment: Sharp fall in US NAHB Housing Index not all due to bad weather, 18 February 2014 and Flash Comment: Further weakness in US housing not just weather related, 19 February 2014).
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