Manufacturing Reports Show Depth of Global Downturn
From Australia, to Asia and Europe and the United States on Wednesday, the message in the latest economic reports was clear: manufacturing continued to slump amid the worst slowdown since the Great Depression.
In the United States on Friday, a crucial measure of manufacturing activity fell to the lowest level in 28 years in December. The Institute for Supply Management, a trade group of purchasing executives, said its manufacturing index was 32.4 in December down from 36.2 in November.
“Manufacturing activity continued to decline at a rapid rate during the month of December,” said Norbert J. Ore, chairman of the Institute for Supply Management Manufacturing Business Survey Committee. This index was at the lowest reading since June 1980 when it was 30.3 percent.
“This report indicates that the U.S. economy was on even weaker footing than commonly believed as 2008 came to a close,” said Joshua Shapiro, chief United States economist at MFR. “Moreover, the signal from the export orders index is that the rest of the world is right there with us. Hardly a signal for economic recovery anytime soon.”
In addition, Mr. Ore said, “New orders have contracted for 13 consecutive months, and are at the lowest level on record going back to January 1948.”
The new orders index was 22.7 percent in December, 5.2 percentage points lower than the 27.9 percent registered in November. No industry sector surveyed reported growth in December; the jobs sector particularly grim. The employment index was 29.9 percent in December, a decrease of 4.3 percentage points from November. That was the lowest reading since November 1982.
In Europe, a closely watched index of purchasing managers showed manufacturing hit a low in December, falling to 33.9 from 35.6. Any reading above 50 signals growth, while a reading below 50 indicates contraction in manufacturing. Similarly grim readings in Australia, China and India highlighted how the Asia-Pacific region has become caught up in the global turmoil.
In China, the purchasing managers’ index by the brokerage firm CLSA showed the manufacturing sector had contracted for a fifth consecutive month. The survey showed the steepest decline in its history.
“With five back to back P.M.I.’s signaling contraction, the manufacturing sector, which accounts for 43 percent of the Chinese economy, is close to technical recession,” said Eric Fishwick, head of economic research at CLSA in Hong Kong, in a note accompanying the release.
The data added to the flood of statistical evidence from across Asia-Pacific showing that the region is slowing faster than previously thought as demand withers in the United States and Europe.
Australia’s manufacturing index showed a seventh month of contraction, and a similar survey in India showed activity down for a second month in December. In South Korea, December data showed exports plummeted 17.4 percent from a year earlier.
President Lee Myung-bak of South Korea pledged on Friday that the government would go into “emergency” mode to pull the country out of its economic crisis.
And in Singapore, the economy shrank 12.5 percent in the last quarter of 2008 from the previous period, prompting the trade and industry ministry to lower its growth forecast for 2009. The ministry now expects Singapore’s economy to shrink up to 2 percent, with only 1 percent growth at best. Previously, it had expected up to 2 percent growth.
Asian stock markets took Friday’s figures in stride, with the Hang Seng index in Hong Kong gaining 4.5 percent. The benchmark indexes in South Korea and Singapore both rose more than 2 percent. Shares in Europe were higher. In London, the FTSE 100 was 1.1 percent higher while the CAC 40 in Paris was up 2.2 percent and the DAX in Frankfurt, 2 percent.
On Wall Street, Friday, the first day of trading in 2009 opened slightly higher. The markets, which were closed Thursday, ended up sharply on Wednesday.
Still, the worsening data, combined with a stream of company profit warnings, production cuts and layoffs, raises the pressure on policy makers to step up their efforts to bolster their economies.
India on Friday cut its main interest rate by a full percentage point, to 5.5 percent, and took a series of steps to bring more funds into the country. It also raised the limit on overseas investments in corporate bonds to $15 billion from $6 billion and will contribute 200 billion rupees, or $4 billion, to increase the capital of state-run banks.
Meanwhile, countries across the region were widely expected to make more interest rate cuts in coming weeks.
“China’s economic outlook for 2009 will be best characterized as ‘getting worse before getting better,’ laying the foundation for a firmer recovery in 2010,” said Qing Wang, chief economist for Greater China at Morgan Stanley in Hong Kong.
Mr. Wang expected the pace of growth to continue to slow in the first six months, before stimulus measures can take effect. “The authorities have already made delivering economic growth a top policy priority by adopting a campaign-style policy execution approach,” he said.
Mr. Wang expects interest rates to be cut aggressively by another 1.35 percentage points this year. The country’s important one-year lending rate is 5.31 percent. He added that a $586 billion stimulus package announced in November “is unlikely to be the first and only stimulus package for the entire year.”
The package includes substantial infrastructure spending, which will begin to lead to increased activity once weather conditions allow construction to begin in the spring. “The stimulus package provides a short-term buffer for the economy, and other policy measures such as health care and land reforms will be a long-term growth driver. This should help the stock market at least to stabilize in 2009,” Yi Tang, general manager at Edmond de Rothschild Asset Management in Hong Kong.
“We are seeing some encouraging signs that institutional investors are starting to consider putting money back into equities in China and the rest of Asia, hopefully in the next month or two,” he said. “But it will take longer for retail investors — who are worried about their job prospects and the wider economy — to go back into the market.”
Jack Healy contributed reporting.
Monthly job cuts hit worst rate in 34 years
By Joanna Chung in New York
Published: December 5 2008 22:50 | Last updated: December 6 2008 00:05
The US economy’s loss of more than half a million jobs in the past month, revealed in official figures on Friday, offered the starkest evidence yet of the financial crisis fallout.
The loss of 533,000 jobs in November was the fastest monthly decline in 34 years and far worse than most predictions of 300,000 to 350,000 losses.
The fear now is that the pace of job losses is only gathering further speed as employers move to slash costs to cope with falling demand. A number of companies announced fresh job cuts this week.
The situation is putting pressure on policymakers, not least because job losses directly hit consumer spending, an important driver of growth.
The Federal Reserve is widely expected in a little over a week to cut its main interest rate even further, from the current 1 per cent. President-elect Barack Obama said yesterday that a recovery plan was urgently needed to save or create at least 2.5m more jobs over two years.
Some economists say a large fiscal stimulus plan could be helpful. However, “it is not clear how much of this will get into the hands of consumers in 2009”, said Campbell Harvey, a professor at Duke University’s Fuqua School of Business.
“It really does look as if someone flicked the off-switch on the US economy during September,” said Richard Yamarone, chief economist at Argus Research, adding that the “really bad news is that there’s no reason to expect this trend to reverse”.
Coupled with sharp upward revisions to September and October figures, the US has lost about 1.2m jobs since the start of September, the largest three-month loss in any period since the months immediately following the end of the second world war, according to Dean Baker, the co-director of the Center for Economic and Policy Research.
Some analysts said the relatively modest increase in the jobless rate – from 6.5 per cent to 6.7 per cent in November, albeit a 15-year high – was also misleading. “The jobless rate was actually restrained by a large decline in the labour force, as we had suspected,” said David Greenlaw, an economist at Morgan Stanley.
Some economists predict that the jobless rate could rise to as high as 8.5 per cent by the end of next year. There are other worrying trends. The weakness in the labour market continues to be broad based, with job losses spread over most sectors, including manufacturing and services.
Conditions for those still employed appear to be worsening. Average work weeks shortened noticeably in November and 621,000 more Americans began working part-time because they were unable to find full-time jobs.
“The one anomaly in this report is the 0.4 per cent increase reported for average hourly earnings,” said Jan Hatzius, at Goldman Sachs. But “there is no way that it should be read as a meaningful indication of labour market trends given the horrendous nature of the entire report”, he said.
Gabriel Stein, of Lombard Street Research, said that labour market data were a generally lagging indicator but there was “a curious dichotomy” in the developments. “What makes these numbers strange is that we have not yet seen anything like the economic weakness that they would imply.”
“In earlier recessions, job losses and an unemployment rate change of this magnitude was already associated with significant falls in activity. Yet so far US output growth has weakened, but on a four-quarter basis it remains positive.” There were a number of potential explanations, among them that a fall in employment and rise in unemployment had a limited impact. But it may also be that “we have still only seen the beginning of labour market carnage and that unemployment is going to get much worse”.
Stocks Fall on Bleak Spending and Jobs Data
Slumping retail sales, poor corporate earnings and trouble in the auto industry conspired to darken the outlook for the American economy on Thursday. But investors bet that the worst was yet to come.
The Dow Jones industrial average plummeted 443.48 points, bringing its total loss since Tuesday to nearly 1,000 points. The Standard & Poor’s 500-stock index, a broader measure of the stock market, dropped 5 percent; in two days, the S.&P. has lost nearly 10 percent of its value.
“There’s a lot of fear out there,” said Brian Gendreau, a strategist at ING Investment Management in New York. “Normally markets are driven by fear and greed. Now it’s fear and fear.”
Investors retrenched after a premarket report showed that sales slowed sharply in October at the nation’s retailers. This holiday shopping season could be the worst in years, analysts said, as consumers buckle down to ride out a looming recession.
A bleak forecast from Cisco Systems, the networking giant, and comments from an executive at General Motors that suggested the company was struggling to survive over the next few months, appeared to discourage even more optimistic investors.
Still, poor economic reports have been arriving almost daily over the last few weeks, and Thursday’s data did not offer a significantly worse sentiment than what investors have heard before.
But analysts said that investors may be selling off ahead of Friday’s report on the job market, which economists expect to be grim. Forecasters believe the Labor Department will report that employers cut hundreds of thousands more jobs in October, bringing the simmering problems in the labor market to a full boil.
”The market already knows the economy is pretty sick,” Meg Browne, a currency strategist at Brown Brothers Harriman, said. “But there is attention being paid to tomorrow’s jobs numbers. We think they’ll be much worse than the market forecasted.”
The government said on Thursday that new claims for unemployment benefits declined by 4,000 last week, to 481,000; readings above 400,000 are considered recessionary. The agency also said that worker productivity grew at an annual pace of 1.1 percent in the third quarter, down from a 3.6 percent growth rate in the second quarter.
The declines on Wall Street came despite sharp reductions in foreign interest rates by central banks seeking to further ease the tight credit markets. The Bank of England lowered its benchmark rate by 1.5 percent, more than analysts had expected, and the European Central Bank cut rates by half a percentage point.
Credit markets also showed some improvements. The amount of outstanding commercial paper — short-term i.o.u.’s used by businesses and banks for daily expenses — rose for a second week, rising $50.5 billion to $1.6 trillion total. That is down from the peak in July 2007, but a significant improvement from last month, when the market for such financing virtually froze up.
Still, the moves did little to reassure European investors, who sent stocks down more sharply than their American counterparts. Stocks in London fell 5.7 percent; Paris stocks were down 6.4 percent. The benchmark index in Germany tumbled more than 7 percent.
In Asia, where stock markets had several sessions of modest rises before the United States presidential election, the Nikkei 225, Hang Seng and Kospi indexes all dropped more than 6.5 percent, wiping out most of a recent rally.
Analysts in Asia said Thursday’s declines were not a huge surprise. “Some fizzle was to be expected,” said Stephen Davies, chief executive of Javelin Wealth Management in Singapore, who said the pre-election rally now looked more like a blip, as investors turned their attention to the difficulties still facing the global economy.
In Tokyo, the Nikkei 225 share average closed 6.5 percent lower after weak United States economic news on Wednesday spelled tough times for Japanese exporters. Shares of Canon and Sony dropped more than 12 percent on Thursday.
After the Nikkei closed, Toyota Motor said that it had slashed its annual profit forecast by more than half. Toyota said it now expected net profit of 550 billion yen, or $5.5 billion, for the fiscal year ending March 31, down 56 percent from its earlier forecast.
Elsewhere, the Hang Seng index in Hong Kong fell 6.4 percent. Shares in Cathay Pacific led the declines, plunging 13 percent after the airline warned of unrealized fuel hedging losses of $360 million, in October.
Investors in Australia joined the retreat with the S.& P./ASX 200 index down 4.3 percent. The Kospi index in South Korea dropped 7.5 percent.
The interest rates are the latest in a wave around the world as policy makers try to prop up their economies and bolster confidence in the financial system.
“After the elections in the U.S., markets are now turning their focus on the issues of economies sliding into a recession again and getting back into the reality of tougher times ahead,” said Richard Hunter, a fund manager at Hargreaves Lansdown in London.
Bettina Wassener and Julia Werdigier contributed reporting.