Industry Crib Sheet: Chinese Manufacturing Up; U.S. Way Up

June 30, 2014

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China's manufacturing sector expanded, albeit slightly, in June as operating conditions improved for the first time in six months, according to the HSBC Flash China Manufacturing PMI. The headline 50.8 reading for the flash PMI was a seven-month high, as was the 51.8 manufacturing output sub-index.

Over the last three months, Chinese manufacturing has clawed its way back to positive expansion territory, with the sector demonstrating improvements via April's 48.1 and May's 49.4 ratings. In June, the major sub-indexes for output, new orders, and new export orders all rose, though employment in China's manufacturing sector continued to shrink but at a softer rate.

"The improvement was broad-based with both domestic orders and external demand sub-indices in expansionary territory," said Hongbin Qu, HSBC's chief economist for China and co-head of Asian economic research. "Inventory reduction quickened, and the employment sub-index also showed signs of stabilization."

A growing work backlog and the influx of new orders should influence higher employment levels among Chinese manufacturers.

Qu commented that the PMI improvements reflect the "mini-stimulus" actions China's central government has taken to push economic growth. The government is holding onto a 7.5 percent GDP growth target for 2014, even as the nation's economy and property sector have slowed considerably. It has implemented measures such as easier access to financing in order to stimulate private investment and home-buying and announced plans for domestic infrastructure projects.

Meanwhile, Markit Economics, which runs the Chinese PMI with HSBC, said the U.S. manufacturing sector continued to push the pace in June, as the Flash U.S. Manufacturing PMI rose 1.1 points to a 57.5 headline rating. It was the strongest upturn in the PMI since May 2010, driven by surges in manufacturing output and new orders. Moreover, Markit said the U.S. manufacturing sector's average pace of expansion from April through June was the fastest for any quarter since its PMI began in early 2007.

New orders, at 61.7 -- a 2.9 point jump over May -- more than offset slow growth in export orders, at 50.9. Bookings for domestic work, in fact, saw the most marked improvement since April 2010, despite business from abroad moving at its slowest pace of expansion in five months. U.S. manufacturing employment rose for the 12th straight month, according to the PMI, though the employment index inched up just 0.1 point to 53.8 over the previous month.

Chris Williamson, Markit's chief economist, said based on the firm's data, U.S. second-quarter GDP should rise by at least 3 percent. However, despite "the best quarter for factories for four years," Williamson said the "near-stagnation of exports" will be a drag on second-quarter growth. Most economists are predicting an above-3 percent GDP expansion for the April-through-June period after an abysmal first quarter. Last week, the Commerce Department reported that the nation's GDP shrank 2.9 percent in the first three months of the year -- the sharpest decline since the recession.

Markit's June data also pointed to strong input price inflation for manufacturers, and the firm remarked that average cost burdens rose at the fastest pace this year. Rising costs for raw materials, especially metals, combined with manufacturers' price growth remaining below the long-run average, put pressure on margins.

The June PMI also showed that manufacturers are dealing with longer supplier delivery times.

Consumer Confidence Shoots Up as Personal Incomes Grow 

Americans are feeling more positive about the economy and the job market but are still showing concerns about their earnings potential, according to a major gauge of U.S. consumer confidence. That news coincided with the release of the Commerce Department's latest report indicating that personal incomes in May grew 0.4 percent.

The Conference Board's Consumer Confidence Index reached 85.2 in June, up a full three points and the highest level since January 2008. The reading beat economists' 83.5 forecast, signaling what could be a major upturn in consumer spending. A Wall Street Journal report indicates that new home sales surged 18.6 percent in May, while mall sales in June are running ahead of forecasts according to the latest available data.

The Consumer Confidence Index's "Present Situation Index," a measure of Americans' sentiment about current job, business, and economic conditions, skyrocketed nearly five points, from 80.3 to 85.1, its highest level in more than six years. The "Expectations" index, meanwhile, rose from 83.5 in May to 85.2, a sign that Americans are optimistic of their job situations as well as the economic outlook over the next six months.

"Expectations regarding the short-term outlook for the economy and jobs were moderately more favorable, while income expectations were a bit mixed," said Lynn Franco, Conference Board's director of economic indicators. "Still, the momentum going forward remains quite positive."

In the survey, 15.9 percent of respondents indicated that they expect their incomes to rise in the next six months, which was down from 18 percent in May. That negative trend was dampened somewhat by a drop in the number of respondents who feel their incomes will shrink in the same period, from 14.5 percent to 12.1 percent. Those anticipating greater availability of jobs in the months ahead increased 1.1 points to 16.3 percent, while those anticipating fewer jobs edged down 0.2 points to 18.7 percent.

According to the Commerce Department report for May, personal incomes have risen four straight months. But as a reflection of modest growth in spending and retail sales, U.S. households are holding onto their money, as the savings rate -- the percentage of savings against disposable personal income -- hit 4.8 percent in May, the highest level since September.

Purchases of durable goods rose 1 percent in May, with motor vehicles accounting for more than half of that increase, while purchases of nondurable goods shrunk even more compared with April, falling 0.2 points to -0.3 percent.

West Coast Port Strike Looms, While NAM Calculates Impact

A six-year contract between dockworkers and container-shipping companies and terminal operators stretching from San Diego to Washington state expires at midnight, threatening a West Coast port strike that could cost the U.S. economy billions of dollars.

Negotiators from the Pacific Maritime Association (PMA) and the International Longshore and Warehouse Union (ILWU) are expected to continue hammering out a new deal past today, though no formal extension of talks had been announced, according to a report by the logistics industry publication Transport Topics. It adds that historically both sides have gone beyond contract expiration dates to get new agreements done, quoting an ILWU spokesman.

Various reports peg the PMA-ILWU contract to cover anywhere from 13,000 to 20,000 shipyard employees and 27 to 30 ports. Transport Topics says these ports process about 40 percent of U.S. trade.

A study conducted by the University of Maryland's Interindustry Forecasting Project on behalf of the National Association of Manufacturers (NAM) and the National Retail Federation (NRF) calculates that a five-day West Coast port system shutdown would cost the U.S. economy $1.9 billion a day in GDP, while a 10-day impasse would impact GDP by $2.1 billion each day. A 20-day work stoppage at the ports would cost up to $50 billion.

The last West Coast port strike occurred in 2002 and lasted 10 days, with widely varying estimates of its economic impact. The NAM-NRF report estimates the cargo that comes through the West Coast represents about 12.5 percent of GDP.

"Manufacturers depend on the ability of West Coast ports to efficiently move cargo," said NAM President and CEO Jay Timmons. "A shutdown would inflict long-term damage to our competitiveness as manufacturers and as a nation."

Both manufacturers and retailers are on high alert as a lockout would cripple supply chains and prevent goods from reaching factories and store shelves. A protracted West Coast port disruption would cause a $1.7 billion loss in export activity, and an import disruption would cost $10.3 billion alone, according to the NAM-NRF study. There would be cascading effects on jobs, international trade, and the economy.

The report says that while goods would eventually be delivered after a strike, delays and rerouting of shipments would force retailers to raise prices but also heavily discount time-sensitive goods by the time they reached stores. Perishable exports and imports would be completely lost.

Real losses will depend on the supply chain resiliency companies show by switching ports, rerouting goods via other methods of transport, seeking out alternate and domestic suppliers, and revamping manufacturing schedules, although all of these would increase operating costs for companies. Last week, U.S. Customs and Border Protection released an outline of procedures for shippers to divert their cargo in case of a strike.

Both NAM and the NRF are calling for PMA and the ILWU to continue their talks and urging the union not to engage in disruption tactics. "It's important for the parties at the table as well as others to fully understand the economic consequences of a port disruption," NRF President and CEO Matthew Shay said.

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