US Factory Contraction

Daily Analysis - 02/12/2015

Manufacturing in the US Drops Amid Concerns About the Slowing Pace of Economic Growth


The latest factory output figures released in the United States showed a contraction of 48.6 in November compared to October’s expansion value of 50.1. As the Federal Reserve opts to remain data dependent ahead of the upcoming monetary policy decision, important figures such as manufacturing and factory output will undoubtedly influence any future rate hike decision.

Global GDP Mixed

Gross domestic product figures obtained from across the 4 corners of the earth continue to highlight the ongoing contraction in the global economy as international trade continues to shrink. Third quarter GDP figures obtained from Switzerland showed the economy flat at 0.00% growth with annualized GDP declining to 0.80% compared to the second quarters 0.90% value. Despite efforts by the Swiss National Bank to keep the Franc competitive, the global outlook continues to weigh on progress. Declines also occurred in Brazil, with the year over year GDP slump accelerating to a -4.50% contraction from -2.60% recorded in the prior period. Further north, Canadian GDP declined -0.50% compared to the previous month’s 0.10% expansion as the mining, gas and oil sectors fell further. Meanwhile, Australia’s GDP managed to beat expectations for both the quarterly and annualized values, increasing at a pace of 0.90% and 2.50% respectively.


European Manufacturing Activity Stable

As markets prepare for the upcoming monetary policy decision from the European Central Bank due tomorrow, expectations of expanded accommodation continue to drive market momentum. Euro Area economies are starting to feel the impact of the loosening of policy with gains in manufacturing as evidenced by the latest Euro Area Manufacturing PMI which showed stable expansion in activity across the whole region. November’s figure matched the consensus estimate, meeting the prior months’ 52.80 reading. Germany, the leading economy in the Euro Area, saw manufacturing print at 52.90, beating forecasts and the previous months’ 52.60 despite ongoing automobile emission scandals. Meanwhile, France managed to stay in expansionary territory at 50.6 but did mark a drop versus the prior period. The Euro managed to recover further from recent losses versus the US dollar after the pair climbed back above the 1.0600 level following profit-taking in the dollar.


US Manufacturing Disappoints

Despite the uptick in Euro Area fundamentals via the gains in manufacturing for the region, the US by contrast is showing a continued weakening as a multitude of factors to continue to weigh on the sector. According to the latest ISM Manufacturing PMI for November, manufacturing activity fell below the 50 threshold to 48.6, printing firmly in contractionary territory and marking the lowest reading since November of 2012. This sharp reversal comes amid a continued ascension in the US dollar which has dented the export economy and weak new orders which continue to weigh on the outlook. Services alone are not enough to boost economic activity which looks set to slow in the fourth quarter according to the latest estimates from the Atlanta Fed GDP model which has been revised lower to 1.40% expansion. Regional equity benchmarks including the S&P 500 still managed to post gains on speculation of renewed Central Bank accommodation.


Euro Unemployment Falls

The European Monetary Union saw its jobless rates fall to the lowest level since the beginning of 2012 in a sign of growing improvement across constituent countries. According to statistics released from Eurostat, unemployment fell in 24 out of the 28 members in the European Union. A slight decrease to 10.70% in October beat estimates, marking an improvement over the prior month’s 10.80% print. Germany in particular saw the unemployment rate drop to 6.30% from 6.40% the previous month. Italy also showed a marked improvement with its unemployment rate declining to the lowest level in three years at 11.50%. The improving labor market trends have come alongside a modest pick-up in economic activity. While positive on a headline basis, such statistics are expected to influence the ECB’s monetary policy stance or decision that will be announced tomorrow.


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