Around the World in Manufacturing

By Fisher Investments Editorial Staff, 04/03/2012

A multitude of March manufacturing data hit Monday, and the headline numbers confirmed an ongoing trend: The world, on balance, is growing, while regional strengths and weaknesses persist. Dig past that surface read, though, and regional manufacturing reports provide a unique lens through which to view some interesting global happenings.

Our worldwide trek begins in the US, where the ISM’s March factory index expanded more than expected. We could say, “manufacturing’s strong,” and leave it at that, but the details are too compelling to skip. The backlog of unfilled orders grew faster than in February, even as production jumped, suggesting demand outstripped supply. And export orders slowed from February, suggesting domestic demand drove the expansion. Underscoring that view are reports of March’s jumping auto sales and February’s durable goods increase—consumers are springing for big-ticket items and firms are investing in new equipment. All point to growth and underappreciated private-sector strength.

Across the Atlantic, UK manufacturing expanded faster, confounding expectations for a slowdown. Firms reported rising domestic demand for consumer goods, suggesting spending could be a positive force for Q1 GDP—perhaps even helping the British economy resume growth. More eye-catching, however, were export data. With the British economy’s recent choppiness and eurozone’s likely recession, manufacturers looked to more robust Emerging Markets to offset weaker local and regional demand: Firms won new business in Japan, Africa and Southeast Asia. Forging these and other new business ties abroad will only benefit the UK’s economy over time.

It seems the eurozone wants to follow that British blueprint. Trade Commissioner Karel de Gucht is on a free-trade crusade as manufacturing’s contraction grips the region—even hitting Germany, as the periphery’s weaker demand hit factories in the core. Officials have become increasingly pro-trade lately—they realize if there were fewer trade barriers between the EU and fast-growing Emerging Markets, eurozone manufacturing would likely be less sensitive to Continental demand shifts. The South Korean free-trade agreement (FTA) has helped, and more FTAs would be a boon longer term. Thus, at last week’s ASEAN/EU summit, de Gucht announced new FTA talks with Vietnam and continued negotiating with Singapore and Malaysia. He’s also eyeing a full EU/ASEAN pact. None are near-term eurozone fixes, but over time, freer trade between the EU and emerging Asia should benefit all parties.

Sticking with Emerging Markets, it was manufacturing March madness in developing nations. Taiwan, Brazil, India, Russia, South Korea and South Africa saw big gains—not surprising, considering the emerging world’s well-documented strength. But less talked of is the effect these nations’ emergence has on less developed peers—struggling nations see the fruits of modernizing and opening their economies, and they’re inspired to follow suit. Take Myanmar, where the prospect of greater economic integration with ASEAN and the world has helped drive significant political reforms—like the weekend’s democratic elections, which saw former political prisoner Aung San Suu Kyi win a seat in parliament. Myanmar, too, is calling for an EU/ASEAN FTA—seemingly a sizable about-face considering Myanmar’s recent global pariah status.

We finish our tour in China, where March’s manufacturing story was a tale of two measures. Official data registered their fourth straight monthly expansion, but a private-sector report contracted for the fifth consecutive month. Some suggest the private-sector report is more reliable, given the communist government’s reputation for dirty data—a fair point, but some of the divergence likely stems from different areas of focus. Official data skew toward large state-owned firms, while the private-sector report leans toward small-to-medium businesses. State-owned firms have easier access to credit since state-owned banks give them preferential lending treatment. Small businesses are often forced to secure funding in the shadow financial system, where borrowing costs are generally higher and lenders often less scrupulous. In our view, March’s manufacturing reports speak more to this two-speed system and last year’s engineered slowdown than the current state of China’s economy. Simply, monetary loosening will likely take a bit of time to be felt broadly in Beijing.

Manufacturing has been a strong force in the global economic expansion for much of the last few years. And recent data suggest that continues.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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