- ISM manufacturing dips due to adverse winter weather, but outlook much less frosty
- Eurozone manufacturing climbs, with Greek manufacturing back in expansion territory
- Global manufacturing remained relatively robust despite falls in the US and China
Adverse winter weather hurts US manufacturing
The ISM manufacturing index unexpectedly dropped from 56.5 to 51.3 in January, though most likely this was due to adverse winter weather. This marked the lowest level since May of last year and abruptly ended the upward trend the index had been on since the middle of last year. The consensus forecasts was for a smaller drop to 56. Looking at the details of the report, the new orders index plummeted to 51.2, down from 64.4, the largest single drop in the past four years. Meanwhile, there were smaller falls in the production sub-index (from 61.7 to 54.8), the employment sub index (from 55.8 to 52.3) and the inventories sub index (from 47.0 to 44.0). Even though the weaker than expected number had quite a big impact on financial markets, we do not expect a sustained slowdown in manufacturing. For a start, the ISM report mentioned that a number of comments from the panel had cited ‘adverse weather conditions as a factor negatively impacting their businesses’, implying that winter weather was the reason behind the bigger-than-expected fall. More fundamentally, the economy seems to have embarked on a period of above trend growth now that the fiscal headwinds have faded, suggesting that any dip in manufacturing should be quickly reversed on the back of firm gains in final domestic demand.
Global manufacturing remained relatively robust
The global manufacturing PMI remained relatively robust despite the sharp fall in the ISM index, edging down to 52.9 in January from 53 in December. This reflects that the US Markit PMI is used as an input for the global aggregate, and this index fell more moderately than the ISM index. In addition, the eurozone manufacturing PMI rose significantly last month (see below). Survey outcomes were rather mixed elsewhere. The manufacturing PMI rose in Japan, India and Brazil, but slipped in the UK and declined notably in China. The latter outcome might have been influenced by the Chinese New Year that can play havoc with the economic data in the country. Looking forward, we expect global manufacturing output to strengthen in the coming months, triggered by stronger demand in the US and the eurozone, which should lift exports and production in the emerging markets.
Eurozone manufacturing PMI up significantly
The eurozone manufacturing PMI rose to 54 in January from 52.7 in December, taking it to the highest level since May 2011. The outcome was slightly higher than the flash estimate (53.9). The output index accelerated particularly strongly, while the ongoing rise in the orders-to-stocks ratio suggest that further robust gains are likely in the coming months. The country breakdown showed a mixed performance. Among the core member states there were strong gains in both Germany and France. The gain in Germany is in line with other evidence that the economy will continue to outperform the eurozone average as the index rose from relatively high levels (from 54.3 to 56.5). The French PMI appears to be playing catch-up as it remains unusually depressed (to 49.3 from 47). Fortunately, the PMI is not a particularly good gauge of the French economy and other indicators have been painting a stronger picture over recent months. Meanwhile, the Dutch PMI suffered a correction after leading the pack last month (down to 54.8 from 57), while the Austrian PMI was flat (at 54.1). Turning to the periphery, we saw continued strong gains in Spain and Greece, but Italy and Ireland saw declines in their surveys. The Greek manufacturing PMI rose above the 50-mark for the first time since August 2009. Greece and Spain have followed Ireland down the path of sharp falls in unit labour costs that have seen their manufacturing sectors regain much of the competitiveness lost in the early years of the euro. Unfortunately, this has not really happened in Italy.