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September 17, 2014

PMI Heats up in the U.S. But Cools in China


You can always count on the United States of America to help boost global manufacturing growth. In its monthly Purchasing Managers Index (PMI) report, JP Morgan announced that the global PMI showed a slight uptick from 52.5 in July to 52.6 in August. The U.S. is again one of the top drivers alongside the Czech Republic, Taiwan, the United Kingdom, Ireland and Canada.

The U.S. ISM Manufacturing Index—our version of the PMI—rose more than 3 percent to close at a stellar 59.0, a three-year high. Meanwhile, China’s PMI inched down 0.6 points in August, from 51.7 to 51.1, ending a five-month winning streak beginning in February.

The monthly index tracks five major indicators in the manufacturing sector, including inventory levels, new orders, production, employment and supplier deliveries. The greater the number above 50.0, the greater the manufacturing expansion over the previous month. Anything below 50.0 would indicate a contraction. Economists rely on these numbers to adjust their GDP estimates.

That the U.S. nearly reached 60.0 supports the belief that we’re in for a robust second half. As I told Palisade Radio’s Collin Kettel recently, the U.S. “hit the ball right out of the park. You can’t even find the ball. It’s gone right past the parking lot. And that makes the dollar very strong.” 
U.S. ISM Manufacturing Index at a Three-Year-High - U.S. Global Investors
This news is tempered somewhat by the most recent nonfarm payroll employment data released by the U.S. Bureau of Labor Statistics. Total employment in the U.S. rose by a weaker-than-expected 142,000 in August, compared with an average monthly increase of 212,000 over the last 12 months.

On the bright side, the National Federation of Independent Business’s Optimism Index, which measures job openings, job creation, capital spending and inventory investment, gained 0.4 points in August to end at 96.1,the second-best reading since October 2007. The largest gains in employment occurred in professional and business services and health care.

Emerging Markets
Commercial and business services also topped the growth ranking in August among global emerging markets, while health care services came in at number six. Business-facing and financial sectors posted their fastest expansion rate since January 2012, closing in on 60.0.  
Detailed Breakdown of Global Sector PMI - U.S. Global Investors
Again, China cooled in August, interrupting its positive five-month run. But at 51.1, manufacturing activity is still expanding, just at a slower pace. 
Despite a Slight Pullback in August, China's PMI Maintains Growth - U.S. Global Investors
This slowdown is partially attributable to fewer orders from and weaker outputs to Europe, which trades more with China than the U.S. does. Europe’s flagging economy, as a result, has been a setback for China.
European imports to China, in fact, declined in August to a 14-month low compared to August 2013. Of the five indicators that compose China’s overall PMI, the New Orders Index dropped the most, from 53.6 to 52.5, a loss of 2 percent.

Another factor that led to China’s downgraded PMI is the country’s reduction in manufacturing jobs as part of cost-cutting measures. Its Employed Persons Index saw a minor dip from 48.3 to 48.2.
Will the People's BAnk of China enact further forms of monetary easing? U.S. Global Investors
Many economists, as well as portfolio manager of our China Region Fund (USCOX) Xian Liang, are now waiting to see if China will announce further stimulus measures to prevent the world’s second-largest economy from slipping even further. Although Premier Li Keqiang has repeatedly dismissed the possibility of another full-blown bailout, typical monetary policy solutions might include cutting interest rates and reducing the amount of reserves banks must hold as deposits.

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Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. By investing in a specific geographic region, a regional fund’s returns and share price may be more volatile than those of a less concentrated portfolio.
The J.P. Morgan Global Purchasing Manager’s Index is an indicator of the economic health of the global manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment. The ISM manufacturing composite index is a diffusion index calculated from five of the eight sub-components of a monthly survey of purchasing managers at roughly 300 manufacturing firms from 21 industries in all 50 states.  

About The Author - Frank Holmes is CEO, Chief Investment Officer of U.S. Global Investors, an investment management firm specializing in commodities and emerging markets based in San Antonio, Texas.  Frank is also the co-author of The Goldwatcher(EconMatters author archive here.)

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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