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US PMI does not indicate a problem just yet [ClearOnMoney]
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US PMI does not indicate a problem just yet

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Commentary

US PMI does not indicate a problem just yet

4 Sep 2012 by Jim Fickett.

The US PMI manufacturing index came in below 50 for August, indicating contraction. And it was the third month below 50. The Financial Times wrote rather dramatically of the “depth of the downturn in manufacturing”.

But all three of the most recent months saw readings just barely below 50 (49.7, 49.8, 49.6), and the index very frequently drops below 50 at the same time that industrial production maintains healthy growth:

This is not to say that there are no danger signs – the US economy remains weak, Europe is probably going to be in recession for some time, and the situation in China is probably worse than indicated by official government statistics (see excerpt below). But let's keep straight the difference between “plenty to worry about” and “a downturn in progress”. Definitely the former. Not yet the latter.

As one example of the (real) slowdown in China, there seems to be something close to panic in the steel markets, driven by a pullback in bank lending and a slowdown in infrastructure projects:

“There is just no demand,” says one trader in the town of Tangshan. “It’s much worse than [the last downturn] in 2008. In 2008 at least you had buyers talking to you. Not any more.” …

The collapse of China’s steel market has reverberated around the world: benchmark prices for iron ore, a key steelmaking ingredient, have dropped to three-year lows of $89 a tonne, down 24 per cent in the past month alone. China accounts for about 60 per cent of global imports of iron ore, a market worth more than $100bn annually worldwide and one that is essential for the profits of global mining houses such as BHP Billiton, Rio Tinto and Vale of Brazil. …

the precipitous drop in iron ore prices over the past few weeks has been triggered by tightening bank credit policies that are forcing traders to sell their stockpiles into the falling market because they can’t extend their loans. This year, China’s bank regulator warned banks of rampant illicit borrowing by steel traders, who had used steel as collateral and then borrowed money to invest in real estate or the stock market.