China Macro: Looking beneath the surface of the May PMIs – At first sight, China’s PMIs for May published so far paint a picture of stability. The official manufacturing PMI dropped marginally to 51.0 (April and consensus: 51.1), while Caixin’s manufacturing PMI edged up a bit to 52.0 as expected (April 51.9). The official services PMI rose to a relatively high level of 55.2 (April: 54.9), confirming that the services sectors – which were most hit by the pandemic on average – are profiting from a further reopening and normalisation of the economy. The official composite output index rose to a four-month high of 54.7 in April, although remaining below the post-pandemic peaks seen in late 2020 (Caixin’s services/composite PMIs will be published coming Thursday). All this is in line with our view that sequential growth in Q2-2021 will be somewhat higher than in Q1 (when a re-tightening of mobility restrictions around the Lunar New Year break hit activity), but clearly below the pace seen in the post-pandemic shock quarters last year as catch-up effects are fading and the credit cycle has started turning.
Evidence of ongoing supply side bottlenecks – Meanwhile, a look at several PMI subindices suggest that supply side disturbances (for instance related to the scarcity of semiconductors and in global container transport) are still in play. Delivery times for China’s manufacturers have lengthened, with the corresponding subindices of both NBS and Caixin falling again. These disturbances seem to go hand in hand with rising cost prices. The official manufacturing PMI’s sub index for input prices rose to 72.8 in May, the highest level since November 2010. Caixin’s equivalent index rose to 64.4, the highest level since December 2016. What is more, container freight tariffs from Chinese ports have risen materially again during May, after some easing in the previous months. The fact that the export-sub index of the official manufacturing PMI fell back to below the neutral 50 mark (48.3) may be an indication that these bottlenecks are starting to hinder Chinese exports (although more factors are at play and Caixin’s export-sub index rose further to 52.3). We are of the view that these disturbances are a temporary phenomenon shaped by the a-typical demand and supply imbalances of the post-pandemic global recovery. While clearly in play in the short-term, these should fade over time, as vaccination rollouts facilitate a further easing of restrictions and normalisation in economic activity, and global demand rebalances towards services again. (Arjen van Dijkhuizen)
US Macro: Labour shortages, backlogs and rising prices – The ISM Manufacturing PMI rose to 61.2 in May, up from 60.7 in April – broadly in line with expectations, and signalling continued exceptionally strong growth in the manufacturing sector. The details showed strong growth in both output and new orders (which rose to 67 from 64.3 in April), but this is now coming at a price – under the hood, a number of indicators point to significant supply-side constraints that are now limiting growth in the sector. For instance, the employment index actually fell by over 4 points, to 50.9 – only just above the threshold signalling expansion. This is not for want of trying to recruit staff – almost all anecdotal comments from survey respondents across industries made some mention of difficulty finding and retaining adequately qualified staff, in addition to problems sourcing materials and components. These difficulties are reflected in record backlogs and lead times for orders, and it is also feeding through to prices – with the diffusion index for pricing at the highest since the global financial crisis. All told, the report shows a manufacturing sector that is struggling to respond to the sudden resurgence of demand of recent months. As a base case, we expect these pressures to ease, as consumption growth cools and labour force participation recovers. However, there is a risk that a prolonged period of excess demand over supply leads to more persistent inflation, which then starts to feed through to expectations. This is a scenario we also explore in our latest Global Monthly. (Bill Diviney)