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Sunday, July 01, 2012 11:07 PM

China Manufacturing Weakens 8th Month; Will the US Economy Continue to Decouple From the Rest of the World?

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The global economy led by Europe and China continues its downward path. Will the US follow?

First let's take a look at China. Markit reports China Manufacturing PMI Declines 8th Consecutive Month.

Key points

  • New orders fall to greatest extent in seven months, as export orders slump
  • Factory output declines marginally in comparison; stocks of finished goods rise 
  • Input costs and output charges down at sharpest rates in 39- and 42-months respectively

China’s goods producers reported an eighth successive month-on-month deterioration in operating conditions during June, as output, incoming new orders and employment continued to decrease. After adjusting for seasonal factors, the HSBC Purchasing Managers’ Index™ (PMI™) – a composite indicator designed to give a single-figure snapshot of operating conditions in the manufacturing economy – inched lower from 48.4 to 48.2 in June, a level indicative of a modest pace of deterioration in business conditions. For the second quarter as a whole, the index averaged its lowest quarterly value since Q1 2009.

A lack of demand was behind the latest deterioration in operating conditions, with total and foreign new orders falling at accelerated rates in June. New export orders placed at goods producers dropped at the steepest rate in over three years. North America and Europe were both cited as sources of new order book weakness. Meanwhile, the month-on-month fall in overall new orders (exports plus domestic) was the strongest in 2012 to date. The drop in total new orders led to a further decline in manufacturing output, extending the current period of contraction to four months. However, the rate of decline in factory output remained marginal.


Commenting on the China Manufacturing PMI™ survey, Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC said: “It is all about growth and employment. As external demand has weakened and domestic demand hasn't shown a meaningful improvement in response to earlier easing measures, growth is likely to be on track for further slowdown, hence weighing on the jobs market. But as inflation eases sharply, Beijing has plenty of room and policy ammunition to avoid a hard landing. We expect more decisive easing efforts to come through in the coming months.”
China PMI vs. Shanghai Stock Index

The following charts show an interesting story of unsustainable growth and over-exuberance by China cheerleaders nearly everywhere.

China PMI

$SSEC Shanghai Stock Index

Decoupling Review

Notice the bubble in 2007. That's when all sorts of ridiculous decoupling theories, US hyperinflation scenarios, US treasury crash scenarios, crude is going to $200, Natural Gas is going to $40, and other nonsensical ideas came out of the woodwork, many in book form, some still persisting to this day.

Instead, the reverse happened! It was the US that decoupled from the global economy. Moreover,  China has been exposed for the malinvestment bubble that it is.

Now, in 2012, nearly everyone but the die-hard hyperinflationists thinks the US will decouple from the global economy. This reverse-decoupling idea is primarily based on the absurd belief the Fed will not let the economy or the stock market down (when the Fed is in fact not in control). For further discussion, please see Is There a Limit on Central Bank's Ability to Inflate?

The debate on the Fed will remain, but the facts show that I disagreed with decoupling in 2007 and I disagree with reverse-decoupling theories now.

Please see 12 Reasons US Recession Has Arrived (Or Will Shortly) for detailed rationale.

Mike "Mish" Shedlock
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