Markets Sink as Manufacturing Data Weighs on Investors

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Chinese Manufacturing Data Confirm Rebound

BEIJING — China’s factory activity expanded for the first time in four months in August as domestic demand rebounded, a private survey showed Monday, a further sign that policymakers may have averted a sharp slowdown in the world’s second-largest economy.

The final HSBC/Markit Purchasing Managers’ Index climbed to 50.1 in August, up sharply from 47.7 in July and in line with the flash reading last week. The survey came a day after a more optimistic official manufacturing P.M.I., which showed factory activity expanding at the fastest pace in more than a year in August, with a jump in new orders.

The official P.M.I., which came in at 51 versus expectations for 50.6, is more weighted toward bigger and state-owned firms, which have easier access to credit and the scale to better cope with downturns.

But a P.M.I. reading above 50 indicates growth while one below 50 demarcates contraction, so the latest data suggest the expansion in August was only modest.

Indeed, the survey showed new export orders dipping from July, staying well below the 50-point threshold. New orders, which include domestic orders, showed marginal growth by rising to 50.8, a four-month high.

“We expect some upside surprises to China’s growth in the coming months,” said Qu Hongbin, an HSBC economist, noting that factory activity had picked up as companies rebuilt their stocks amid recent steps taken by the Chinese authorities to boost activity.

Indian Manufacturing Shrinks for First Time in Four Years

BANGALORE, India — Indian factory activity shrank for the first time in more than four years last month, a survey showed Monday, adding to the country’s deepening economic malaise even as the central bank struggles to defend the battered rupee.

The bleak purchasing managers’ index comes hard on the heels of data Friday that showed Asia’s third-largest economy had grown at its slowest quarterly rate in the three months to June since the global financial crisis, suggesting more pain ahead.

The HSBC Manufacturing P.M.I., compiled by Markit, sank to 48.5 in August from 50.1 in July, the lowest reading since March 2009. Economists polled by Reuters had expected a fall to 49.9.

The index, which gauges business activity in Indian factories but not utilities, had been close to the 50 mark that separates growth from contraction since May, but falling orders dragged it under last month.

“Manufacturing activity contracted in August for the first time since March 2009. This was led by a decline in new orders, especially export orders,” said Leif Eskesen, chief economist for India at HSBC, the survey’s sponsor.

The survey showed new export orders shrank for the first time in a year.

In a sign that domestic demand is also faltering, new orders, which include domestic orders, shrank at a faster pace. The index fell for the sixth straight month to 47.5 in August, its lowest since February 2009.

Manufacturing Index Rises

The U.S. manufacturing sector grew last month at its fastest pace in more than two years, with the Institute for Supply Management's (ISM) index of national factory activity rising to 55.7 in August from 55.4 the prior month.

That comfortably beat expectations for 54, with the index at its highest since June 2011.

A reading above 50 indicates expansion in the sector.

"This was an unambiguously positive report, signaling a further acceleration in manufacturing momentum in August," said Millan Mulraine, director of U.S. research and strategy at TD Securities in New York.

New orders also marked their best level in more than two years, with that sub-index jumping to 63.2 from 58.3.

The reading for new orders minus inventories, a way to extrapolate so-called final demand, marked its highest in more than three years, as well. That measure of demand has now risen for three straight months, potentially adding more evidence to support a Fed pullback in bond buying.

Employment, however, slipped to 53.3 from 54.4.

Jobs data are especially important to the Fed, which wants to see the unemployment rate closer to 6.5 percent. It is currently 7.4 percent.

The manufacturing data helped accelerate a slide in Treasuries prices on Tuesday, with U.S. 10-year notes down one point and 30-year bonds down two points.

U.S. construction spending rose in July, too, climbing 0.6 percent to an annual rate of $901 billion, the Commerce Department said. The growth rate was above the median forecast in a Reuters poll of analysts.

In addition, demand picked up in the U.S. manufacturing sector in August, a separate report showed.

Financial data firm Markit said that while its final U.S. Manufacturing Purchasing Managers Index eased to 53.1 from July's reading of 53.7, a pickup in new orders and a drop in inventories pointed to faster growth ahead.

"Inventories of finished goods showed the largest fall since 2009 as some companies reported that demand often exceeded production," said Markit chief economist Chris Williamson. "Factories will need to ramp up production to replace depleted inventories given this order book growth."

Faster global growth could help persuade policymakers at the U.S. Federal Reserve to slow their massive bond purchase program soon.

The bank is now buying $85 billion per month in Treasuries and mortgage-backed securities, but policymakers have hinted at exiting from the strategy as the U.S. economy grows strong enough to stand on its own.

A more vigorous U.S. economy could nudge the Fed closer to a pullback as soon as its next meeting on September 17-18.

But with U.S. data still often painting a mixed picture, that potential September exit could yet change.

Investors are awaiting the August nonfarm payrolls report, due on Friday, for more clarity on the health of the U.S. jobs market.

Other data on Tuesday and earlier in the week also pointed to more robust global growth.

In China, domestic demand helped the services sector grow steadily in August, suggesting government measures have started to steer Asia's biggest economy out of its longest slowdown.

European factory data also pointed to growth in August, including faster-than-expected manufacturing growth in Britain.

The survey was especially welcome after a long economic stagnation in the U.K., which earlier this year flirted with a triple-dip recession.

(Reporting by Luciana Lopez; Editing by Chizu Nomiyama and Andrea Ricci)

Manufacturing Gains Strength, But Hiring in Sector Stays Weak

A separate report on Monday showed that construction spending neared a four-year high in May, a sign that it has regained some strength after having collapsed in the 2007-2009 recession. Even with consumer and housing data pointing to a steadily improving recovery, pockets of concern remain, particularly jobs.

The Institute for Supply Management said its index of national factory activity rose slightly more than expected in June, to 50.9 from 49, with a reading above 50 indicating expansion. The gauge for new orders rose to 51.9 from 48.8, while production jumped to 53.4 from 48.6, helping the overall index bounce back from a contraction in May — the first in six months.

“It’s nice to see manufacturing moving back into growth territory from contraction,” said Joel Naroff, president of Naroff Economic Advisors in Holland, Pa.

But a measure of employment fell to 48.7, the lowest reading since September 2009. It was 50.1 in May. That could feed concern about the strength of the recovery, particularly since the Fed has said it could begin to wind down its stimulus this year.

“The employment issue is key,” Mr. Naroff said. “If those jobs are not there, you are not going to get consumer demand.”

A separate index from Markit, also showed modest growth in manufacturing, but recorded 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 Chris Williamson, Markit’s chief economist.

Construction spending neared a four-year high in May, though difficulties in the commercial real estate and factory sector subdued the pace of recovery.

Chinese Manufacturing Sector Expanded in December

An important gauge of China’s giant manufacturing sector published Tuesday showed a third successive month of expansion in December and underlined the view that the world’s second-largest economy has settled into a mild rebound that is likely to extend into 2013.

A survey of purchasing managers in the manufacturing sector, released by the national statistics bureau on the first day of the new year, produced a reading of 50.6 points for December. Figures above 50 mean the sector is growing, while those below suggest contraction.

A similar survey released by HSBC on Monday painted a similar picture of solidifying recovery. That index, which is more focused on smaller, privately held businesses than its official counterpart, came in at 51.5 - a full point above the November reading, and the highest in 19 months.

After a marked slowdown during much of 2012, the Chinese economy began to regain some momentum during the last few months of the year. A modest increase in exports, combined with government-induced infrastructure spending and other economy-supporting measures, dissipated fears of a ‘'hard landing'’ during the final quarter of 2012. Analysts widely expect the economy to have expanded about 8 percent in 2012, and to record similar or even slightly stronger growth in 2013.

At the same time, however, analysts caution that the Chinese economy will need to grapple with a host of major challenges and that growth is likely to slow by several percentage points over the next decade.

‘'Looking forward, China’s cyclical rebound still faces strong headwinds,'’ Li-Gang Liu and Louis Lam, economists at ANZ, commented in a research note on Tuesday. ‘'Economic and policy uncertainties in the U.S. and the E.U. suggest that external demand for Chinese exports will remain sluggish.'’

Domestically, the government is grappling with rampant corruption and environmental degradation, a widening gap between rich and poor, and the need to reduce the dominance of state-owned enterprises. For growth to be sustainable, the economy will also need to become more driven by domestic demand, rather than government-induced investment and exports, analysts believe.

China’s rapidly changing demographics — an aging population will cause the proportion of non-earners to soar in the coming years — is adding considerable time pressure.

‘'The problem is not so much how to maintain short-term growth momentum, but how to prepare China for the demographic challenge ahead,'’ Yao Wei, an economist at Société Générale in Hong Kong, said at a media briefing in last month. ‘'Within ten years, China will have worse demographics than South Korea or Japan. The window of opportunity for policymakers is closing very quickly,'’ she added.