US factory output shrinks, stoking fears over growth

Reuters/New York/London

Manufacturers in the US and Europe struggled last month as demand fell, suggesting an ailing world economy that still needs a steady diet of central bank support.

Output at US factories declined in May for the first time in six months, the Institute for Supply Management reported, while China’s massive manufacturing sector shrank for the first time in seven months, adding to concerns that the world’s two largest economies were losing momentum in the second quarter.

Eurozone manufacturing contracted again in May, its 22nd straight month of decline, though the depth of the downturn eased for the first time in four months.

In the US, the data bolstered the view that the economy was undergoing yet another spring swoon after expanding at a 2.4% rate in the first three months of the year.

That makes it unlikely the Federal Reserve would soon start to scale back the $85bn in bonds it is buying each month. Fed Chairman Ben Bernanke said in May those purchases could be reduced at one of the central bank’s “next few meetings.”

“While the data for now constrains the thoughts of tapering (bond purchases), it is weak enough that it will also raise broader questions on global growth,” said Alan Ruskin, global head of G10 FX strategy at Deutsche Bank in New York.

US data last week showed consumer spending fell in April for the first time in almost a year and inflation retreated further from the Fed’s 2% target.

San Francisco Fed President John Williams yesterday became the second central bank policymaker in recent days to warn that falling inflation would make it harder for the Fed to ease up on asset purchases.

“There are a lot of questions right now. Things are soft in Asia and Europe and the market is looking at higher yields and government spending cuts that are likely to hit the US,” said William Larkin, a portfolio manager at Cabot Money Management. “My guess is it’s too early for the Fed to ease off.”

A separate report from financial data firm Markit showed the US factory sector continued to expand in May but at a sluggish pace, suggesting it would likely be a drag on second-quarter growth.

Markit’s eurozone PMI rose to 48.3 from April’s 46.7. That still reflected contraction but was the highest reading since February of 2012.

The PMI for Germany, Europe’s largest economy, remained sub-50 but did improve and it was a similar story in neighbouring France, the bloc’s second biggest economy. Spanish and Italy’s PMIs behaved similarly.

British manufacturing, however, expanded at its fastest pace in over a year last month, boosting optimism that the country’s recovery is becoming more broad-based.

An upward revision to April meant British factories have now expanded for two straight months.

European firms cut prices for the second month in May — the output price index fell to its lowest since January 2010 — but that still failed to push a new orders index above the breakeven mark, suggesting this month’s PMI will see scant improvement.

With the eurozone enduring its longest recession, the European Central Bank has come under growing pressure to take more action to help bring a quicker end to the downturn.

ECB President Mario Draghi has said the central bank is ready to cut interest rates again if the bloc’s economy deteriorates further, but a Reuters poll taken last week did not forecast any more policy easing.

In contrast to the weakness elsewhere, British manufacturing expanded at its fastest pace in more than a year, a possible sign of more broad-based recovery in the UK economy.