This Growth Puzzle Has an Easy Solution
03/01/2011 4:14 pm EST
It’s a mixed bag on manufacturing growth from the world’s economies this morning:
• In China, manufacturing grew at the slowest rate in six months. The China Purchasing Managers’ Index fell to 52.2 in February from 52.9 in January, according to the China Federation of Logistics and Purchasing—the third straight monthly decline.
• In the United States, the Institute for Supply Management’s national factor index climbed to 61.4 in February, from 60.8 in January.
• In Europe, manufacturing expanded at the fastest rate in 10 years.
The easy conclusion here is to connect manufacturing growth rates with inflation and interest-rate policies. China is fighting inflation by raising interest rates in order to slow growth; the United States and the European Union are still letting inflation run in order to accelerate economic growth before raising interest rates later in 2011.
With the caveat that it’s always hard to interpret economic data from China in January and February, as the timing of the Lunar New Year holiday can distort comparisons of economic activity from year to year, I think that easy conclusion has a high probability of being correct.
(It’s also important to remember, when trying to figure out what this data means, that manufacturing accounts for only about 11% of U.S. economic activity. Data on consumer spending released yesterday showed weaker growth than expected. See my new post on this. )
That said, if this most recent manufacturing data gives an accurate picture, it would make the middle of 2011 the real crunch point for the year.
At that point, China’s attempts to fight inflation could be taking a bigger bite out of growth, the Federal Reserve will be ending its second program of quantitative easing—and U.S. market interest rates will be on the rise in all likelihood—and the European Central Bank will be very close to actually raising its benchmark interest rates.
Exactly how much the global economy will grow in the second half of 2011 will depend on how all three pieces fit together.
Let’s not forget the two big pieces of the puzzle not addressed in these numbers: oil prices and the U.S. construction market.
For oil, the important question is how fast—if at all—prices come down after the Libya crisis is over. For housing, the questions are when US home prices will finally bottom, and when the huge slump in commercial building projects—now the worst in 17 years—will finally show signs of ending.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund (JUBAX), may or may not now own positions in any stock mentioned in this post. For a full list of the stocks in the fund as of the end of January see the fund’s portfolio here.
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