Manufacturing on a Roll

The manufacturing sector is starting 2013 with the tailwind of some very positive news behind it. In many parts of the globe — both developed and developing economies — manufacturers are reporting solid or stable growth in new manufacturing orders and output, according to researchers and industry organizations.

One would have expected manufacturing to slow down as 2012 drew to a close since sales activities have typically been dull in January and much of the first quarter. That wasn't the case in December, according to a report from industry consultant Markit and another monthly survey by the Institute of Supply Management. Manufacturing activities were globally stable in the last month of the year and even rose in several key economic regions, Markit said, noting improvements in leading economies as well as emerging markets.

In the United States “economic activity in the manufacturing sector expanded in December, following one month of contraction, and the overall economy grew for the 43rd consecutive month,” the ISM said in its report.

Elsewhere, the UK, China, and the US posted surprisingly strong manufacturing numbers with the global manufacturing PMI calculated by Markit in conjunction with the ISM and JP Morgan rising in December above 50, the point between economic contraction and expansion, for the “first time since May 2012,” Markit said. The company said further:

    Among the largest industrial nations covered by the survey, solid gains in output were recorded in the US, China and the UK. Emerging markets also fared well, with expansions continuing in Mexico, India, Brazil, Turkey and Indonesia. Although growth in Russia and Vietnam slowed to near stagnation, trends in output stabilized in South Korea and Taiwan following six-month periods of contraction.

Of course, such good news never fails to come with a few kinks. The UK might have recorded an unusual manufacturing expansion last month, but the country is by no means representative of trends in Europe. The eurozone economies remain under pressure, and the entire region contracted “for the tenth month running, while jobs were cut for the eleventh straight month,” Markit reported. Japan posted an even worse performance. “The downturn in Japan gathered pace, with production falling at the sharpest pace since early-2011 and payroll numbers declining for the third consecutive month.”

Stagnation in the eurozone and Japan shouldn't surprise anyone. The European economy has yet to shake off the malaise that has gripped the region for the last several years now, and it was unlikely a sudden growth spurt elsewhere in December could revive growth in the area. In fact, continuing fiscal tightening by regional governments will most likely further depress consumer demand and corporate capital expenditure.

In the case of Japan, the recent elections and the appointment of a new prime minister have raised hopes some much needed economy-boosting activities could be seen soon, but those expectations will most likely be dashed. Japan has been battling negative growth for a while, and the consensus amongst economists is that it won't recover without some major catalyst spurring on government and penny pinching consumers.

Will global manufacturing continue to improve over the coming months, or will we see a reversal of the gains posted in December? I believe each region — and maybe even individual countries — will record quite different experiences. In the case of the UK, the celebration of manufacturing resurgence may be premature. If the government continues to savagely cut entitlements it will eventually drive down demand again, because corporate recruitment remains tepid.

The US economy might surprise everyone with continued strength. Current growth projections aren't very optimistic, but with the first scare of the “fiscal cliff” over and as a new Congress is sworn in, combined with a reelected president eager to secure his legacy, the focus might be not just on budget cuts and debt-reduction. Congress and the President might even find themselves working harder to find ways to further reduce the unemployment rate.

If that happens in the United States, the rest of the world will benefit strongly: Chinese manufacturing will sprint higher, Europe should catch a lift, and emerging economies could see their currently low level of optimism blossoming. That may sound like wishful thinking, but very few people were expecting manufacturing to be strong in December either.

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