U.S. factories rebound, China struggles, Europe shows promise

NEW YORK/LONDON Mon Jul 1, 2013 8:07pm IST

An employee welds a water turbine at a factory in Jinhua, Zhejiang province May 23, 2013. REUTERS/William Hong

An employee welds a water turbine at a factory in Jinhua, Zhejiang province May 23, 2013.

Credit: Reuters/William Hong

NEW YORK/LONDON (Reuters) - U.S. manufacturing staged a modest rebound in June even as hiring declined sharply but activity among China's large goods producers slowed to multi-month lows as global demand weakened.

Worries about the strength of the factory sector in the world's two biggest economies took some of the shine off survey results showing that Europe's prolonged economic slump may have at least stabilized and possibly reversed in some areas.

"Global manufacturing is showing signs of renewed weakness. With not very strong momentum in China, we wonder if this trend in the euro zone can continue," said BNP Paribas strategist Evelyn Herrmann.

Markit's final Eurozone Purchasing Managers' Index rose to a 16-month high of 48.8 in June, and some debt-strapped countries such as Spain appeared on the verge of growth.

But a cheerless outlook for China - an official survey showed factory growth stalling while a private one showed it at a nine-month low - remains a concern as demand dries up from customers at home and abroad.

"The Chinese economy is far from out of the woods. A few sub-indicators of the PMI have long indicated that the economy is in sharp distress," said Xianfang Ren, an economist at IHS.

The picture for the U.S. factory sector was also mixed. The Institute for Supply Management's closely watched index bounced back last month after indicating an unexpected contraction in the sector in May. But firms took on the fewest new workers since September 2009.

"It's nice to see manufacturing moving back into growth territory from contraction," said Joel Naroff, president of Naroff Economic Advisors in Holland, Pennsylvania.

"But unfortunately on the employment side, they are not hiring. That's not a good sign. The issues in Europe and China are not going to help exports," he added.

A separate index from Markit also showed modest growth in the sector but sharp slides in hiring and new orders from abroad.

"Firms are responding to the increasingly worrying order book trend by pulling back on recruitment," said Markit chief economist Chris Williamson.

That may complicate things for the Federal Reserve, which said it could begin scaling back its massive stimulus program later this year provided the U.S. economy does not lose momentum.

Economists polled by Reuters expect growth in the broader U.S. economy to have slowed to 1.7 percent in the second quarter from 1.8 percent in the first, though most say it should pick up steam in the second half.


Any hint of recovery in Europe will be welcomed by the European Central Bank, which has come under pressure to take more action to help bring a quicker end to recession that has persisted for 18 months.

The euro zone, according to a Reuters poll last month, will show flat growth for the second quarter and eke out just 0.2 percent expansion this quarter. This would, however, take it out of recession.

But ECB President Mario Draghi and other policymakers said last week that an exit from the current stimulative monetary policy stance remained "distant." The bank is not expected to change its main interest rate from a record low of 0.5 percent when it meets this week. <ECB/INT>

One central bank that can take comfort from recent data is the Bank of Japan, which embarked on a massive monetary stimulus campaign in April aimed at ending decades of falling prices and stagnant growth.

For now, Japan appears to be bucking the manufacturing trend in Asia as sentiment at the country's big manufacturers turned positive in the three months to June for the first time in nearly two years.

The improvement in sentiment shown in the BoJ's quarterly "tankan" survey indicated that recent market turbulence has yet to hurt the feel-good mood created by Prime Minister Shinzo Abe's policy of aggressive monetary and fiscal stimulus.

"More evidence that Abenomics is working. Monetary and fiscal stimulus should boost Japanese growth this year and next," said Rob Wood at Berenberg Bank.

In Europe, outside the euro currency bloc, British manufacturing grew at its fastest pace in more than two years.

But in China, officials warned that things could worsen and the official growth target appeared to be under threat.

Zhao Qinghe, a senior statistician at the statistics agency, said after Monday's data that the country's factory growth is likely to founder further and that factories, preparing for glum times, have cut jobs for 13 consecutive months.

In India, Asia's third-largest economy, an HSBC PMI edged up even though output shrank for the second month and order books contracted for the first time in four years.

Taiwan, a barometer for global electronic exports, saw its PMI rise, but in South Korea the PMI showed factories suffered their first drop in business in five months.

(Additional reporting by Langi Chiang in Beijing and Richard Leong in New York; Editing by James Dalgleish)

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