Deteriorating economic growth and activity in China and Europe implies a continued and worsening issue in the United States. The latest PMI data was alarming with European services and production output falling deeper into recession and China manufacturing output falling to a critical point.
Flash Eurozone Composite Output
Flash Eurozone Services
Flash Eurozone Manufacturing
F E Manufacturing Output
Flash Germany Composite Output
Flash France Composite Output
The HSBC Flash China Manufacturing PMI dropped to a two-month low of 50.5 in April, down from 51.6 in March. That is extremely concerning news, considering that a mark of 50.0 delineates between economic expansion and contraction. Chinese stocks collapsed on the news, with the iShares FTSE China 25 Index Fund (FXI) down 0.6% in morning trading Tuesday. However, this is critical news for American econo-watchers as well, because it reflects the deteriorating state of global demand for goods made out of China. It means Americans and Europeans are not buying as much Chinese made stuff. It's also bad news for American companies selling into China's expansion and reaching its expanding middle class.
Couple the Chinese failing with the fact that eurozone area services and factory output contracted in April, and you have another major reason to worry about the global economy. Europe is no surprise, as it marked its 15th consecutive month of services and manufacturing segment recession. However, things are getting even worse in Europe, confirmed last week by General Electric (GE), when it said as much and led me to pen, Why I Would Sell GE.
The Eurozone Purchasing Managers Index data was horrible any way you look at it. You would expect Europe to be trading down on the news, but hopeful investors are finding reason to believe the ECB and other European authorities might change their tune from austerity to growth-inspiring monetary and fiscal policy. So, the iShares S&P Europe 350 Index (IEV) is higher by 1.7% in morning trading despite the bad news.
Economists, however, should mind that Germany slipped this month, with its composite index and general data falling deeper into contraction territory. The German and French economies are bookend supports for Europe, and they are each cracking. The French economy declined as well, based on Markit Economics' PMI data, but the pace of contraction was a little less miserable this month.
This is really bad economic news for both America and the global market, and yet American stocks are taking their lead from Europe today, likely on that same false hope in central banks.
Through 11 AM Tuesday
SPDR S&P 500 (SPY)
SPDR Dow Jones (DIA)
PowerShares QQQ (QQQ)
The data from China and Europe indicates that there could be lighter demand for U.S. goods in both regions, and that there might be less American demand for goods from overseas as well. We cannot say for sure from these data points alone, since some of the issue in China could be solely due to a deteriorating Europe. Still, as multinational companies like GE, Caterpillar (CAT), McDonald's (MCD) and others is impacted by international weakness, investment wealth is damaged, job opportunities diminished and personal income and spending in the U.S. hampered; thus U.S. operations are impacted as well.
These international issues are weighing on the U.S. economy, as evidenced by the 10 economic data points that deteriorated last week and those failing this week, including existing home sales and the Chicago Fed's National Activity Index on Monday. Our economy is also handicapped to begin with, burdened by a high level of undocumented unemployment. GDP will be reported at the close of the week, and while I'm not sure how important March will play against decent activity in January and February, I think the trend through April is becoming increasingly evident in both the global macroeconomic data flow and the anecdotal evidence produced by American multinationals in their earnings results. As a result, your author here continues on the recession watch, and remains dedicated to keeping followers updated on economic issues.