A Manufacturing Slowdown or a Short-Term Correction?

It's that time of the month when manufacturers, supply chain experts, and economists ready themselves for the news: Did the sector grow, shrink, or hold steady?

By all signs, May was a contraction month as manufacturing slowed globally. A slowdown in Asian growth, high input prices, lower demand in the US, inventory adjustments, and supply chain disruptions from the tsunami disaster in Japan cast shadows over most regional Purchasing Managers' Indexes (PMIs), according to news reports.

Following the sun, most parts of Asia that matter to the high-tech industry reported lukewarm results Wednesday. In China, the PMI fell to 52.0 in May from 52.9 in April, according to a Wall Street Journal report. While the figure is above 50 — indicating continued expansion — May's decline is the second straight month growth has slowed. Taiwan's PMI also fell, but remained above the 50 mark, and in South Korea, manufacturing growth fell to its slowest pace in six months.

The Financial Times reported that the pace of India's manufacturing growth “moderated slightly,” mostly in response to recent interest rate increases designed to curb inflation.

On the upside, tsunami-beaten Japan had a better month. The country's PMI strengthened to 51.3 from 45.7 the previous month, “signaling one of the largest month-on-month improvements since the index was first compiled in 2001,” according to the same FT article.

In Europe, the news had a depressing feel. Reuters reported Tuesday that preliminary euro-zone manufacturing data for May posted its biggest one-month fall since the collapse of Lehman Brothers in 2008. A follow-up WSJ account pointed out how the euro region's strongest nations fared: Germany's manufacturing activity grew strongly in May, but at the slowest rate for seven months; Italian manufacturing grew at the weakest pace for six months; and France slowed to a four-month low.

In the US, the pace of manufacturing growth slowed to its lowest level in more than one and a half years. The PMI of national factory activity fell to 53.5 in May from 60.4 the month before. Again, while it's above 50 and marks the 22nd consecutive month of expansion, it's far lower than expectations. On average, economists expected this month's number to come in around 57.7, according to Reuters.

“Slower growth in new orders and production are the primary contributors to this month's lower PMI reading. Manufacturing employment continues to show good momentum for the year, as the Employment Index registered 58.2 percent, which is 4.5 percentage points lower than the 62.7 percent reported in April. Manufacturers continue to experience significant cost pressures from commodities and other inputs,” Bradley J. Holcomb, chair of ISM's Manufacturing Business Survey Committee, said in a press release.

Personally, I've always wondered how much weight these reports (manufacturing indexes, pricing data, consumer confidence, employment figures, etc.) carry. I'm not sure any one of them tells a complete story. Collectively, however, they do provide a clearer snapshot of a moment in time. There was a recession, an earthquake, some other big news event, and for this period in time there was a reactionary kind of ebb or flow that moved the needle up or down. But, even so, it seems to be a static picture of past activity.

Where I think these reports offer the most help is in tracking patterns over time and planning future activity against these anticipated patterns. So, what patterns do you see in this latest round of numbers? What’s your crystal ball revealing? Is this month’s dip a temporary correction? Or are some of the recovery drivers we’ve been banking on, like ongoing strong growth in China, India and Germany, really cooling down? What kind of manufacturing environment are you planning for during the last two quarters of this year?

4 comments on “A Manufacturing Slowdown or a Short-Term Correction?

    June 2, 2011

    I am in the semicon business and Q1 was not a good quarter.  Even though direct sales to Japan account for a small portion of our revenue I was surprised by the scale of the knock on effect of the earthquake and tsunami to our other larger Asia customers with its subsequent impact on our own numbers.   Q2 is looking up a bit but the outlook remains cloudy as it has been for some time.  With the recent news of some Scandinavian countries dipping back in to recession I fear that we are far from being out of the woods yet.

  2. Jay_Bond
    June 2, 2011

    One of the things I've taken from that report is that the numbers might not have met expectations, but they are overall still improving. I feel that there was a sort of market correction going on as production got ramped up following the exiting recession. The months of April and May were very busy worldwide with disasters, conflicts, and the exchanges. All of this causes emotions to run amuck and ultimately always affects production, sales, and purchasing. As long as we are seeing overall growth the market is looking bright.

  3. SunitaT
    June 3, 2011

    “On the upside, tsunami-beaten Japan had a better month. The country's PMI strengthened to 51.3 from 45.7 the previous month”

    Jennifer, Surprised to know that Japan's PMI strengthened, when all other countries PMI weakened. Any particular reason for this strength ?

  4. Jennifer Baljko
    June 3, 2011

    Tiriapur: Japan's PMI – Here's one of the better explanations I can find.

    PMI survey data pointed to a welcome rebound in Japanese manufacturing activity in May, as a sharp easing in supply chain pressures enabled firms to restart production lines following the disruption caused by March's earthquake and tsunami,” said Alex Hamilton, an economist at Markit. ( From Reuters,

    FLYINGSCOT: Thanks for honesty and candid outlook. Living in Europe, I'm also interesting how lots of things shake out in the next couple of quarters. There is quite a big gap between how countries are faring post-recession. I know Spain, where I'm based, is also far from being out of the woods, too.

    Jay_Bond: “All of this causes emotions to run amuck and ultimately always affects production, sales, and purchasing.” – You're exactly right. It's amazing that we may not be able to ever get away from this bullwhip effect where things are often out of whack for good or for bad.

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