January manufacturing activities weakened in China to their lowest level since last June, dragged down by a drop in export orders and as companies increased job cuts, according to the HSBC monthly report on global production. The employee attrition rose to a nearly 5-year high, the bank said in the report jointly compiled with Markit Economics.
The decline in Chinese manufacturing, combined with similar weakness in the United States hurt global equity markets on Monday with the Dow Jones Industrial Average falling nearly one percent at the opening and the Nasdaq Composite Index sliding 1.2 percent. The equity market decline accelerated by midday as investors absorbed news the U.S. manufacturing sector had also slowed in January, dropping more than 5 percentage points to 51.3 from December’s seasonally adjusted 56.5, according to the Institute of Supply Management (ISM).
"The New Orders Index registered 51.2 percent, a significant decrease of 13.2 percentage points from December's seasonally adjusted reading of 64.4 percent. The Production Index registered 54.8 percent, a decrease of 6.9 percentage points compared to December's seasonally adjusted reading of 61.7 percent,” said Bradley Holcomb, chair of the ISM Manufacturing Business Survey Committee, in a report. “Inventories of raw materials decreased by 3 percentage points to 44 percent, its lowest reading since December 2012 when the Inventories Index registered 43 percent. A number of comments from the panel cite adverse weather conditions as a factor negatively impacting their businesses in January, while others reflect optimism and increasing volumes in the early stages of 2014."
More troubling for economists and observers was the report on China’s manufacturing sector, which signaled a decline in production for the first time in about six months. With China accounting for an increasing chunk of global manufacturing, a slowdown in the country is seen by experts as a worrying sign for the worldwide economy. China’s purchasing managers’ index fell to 49.5 in January, dropping below 50 and indicating a contraction in the economy, according to HSBC. The PMI was at 50.5 in December and analysts had been concerned even this was a less than desirable level of economic growth.
“A soft start to China's manufacturing sectors in 2014, partly due to weaker new export orders and slower domestic business activities during January,” said Hongbin Qu, Chief Economist, China & co-head of Asian Economic Research at HSBC, in a report. “Policy makers should pay attention to downside risks and pre-emptively fine-tune policy to steady the pace of growth if needed."
In contrast to the U.S. and China, the European Union registered stronger performance in manufacturing in January. The regional PMI rose in January to 54, its highest level since May 2011 and up from December’s 52.7. Germany led the expansion and both Greece and Spain also experienced strong manufacturing growth, according to HSBC.
“The euro zone manufacturing recovery gained significant further momentum in January, with final PMI readings for Germany, France and the region as a whole all exceeding the earlier flash estimates,” said Chris Williamson, chief economist at Markit, in a statement. “The survey data indicate that manufacturing output across the Eurozone is growing at a quarterly rate in excess of 1 percent, led by Germany, where the rate of increase is perhaps as strong as 3%. However, perhaps the most important development in the report is the further revival of manufacturing in the region’s periphery. Both Italy and Spain are seeing robust growth of output and order books, and the Greek PMI’s rise above 50 for the first time since August 2009 is an important signal of how even the most troubled member states are returning to growth.”