China Growth Slows Now, And Europe May Worse Trend

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The two primary signs of China’s manufacturing expansion showed weakness in May. The China Federation of Logistics and Purchasing managers index dropped to 53.9 last month compared with 55.7 in April. The HSBC China Manufacturing Purchasing Managers Index fell to 52.7 in May from a revised 55.2 in April.

Analysts blamed credit tightening and resulting lack of capital for manufacturers for the declines, but Europe may hasten the slowdown and even drive China industrial expansion to a halt. A number below 50 on both indexes means contraction.The economic problems of Europe are Europe’s alone, or at least that is the position of the US and Chinese governments. There are enough other markets in the world that are recovering fast enough from the global recession that exports from the two giant economies will be fine, although they could tick down very moderately.

But, the EU economy is the world’s largest by GDP at nearly $15 trillion, and it would actually take only a modest recession in the region to cut of the growth of manufacturing in the US and China. The Chinese economy and government reserves are large enough to create another stimulus package like the one the $585 billion one People’s Republic fielded in 2009.

The US is not so fortunate. The federal government does not have access to another $787 billion for a new stimulus package. Congress recently cut significant amounts from a “mini-stimulus” package proposed by The White House. The midterm election and general concerns over the national debt are growing, and Europe’s problem will become America’s very soon.

China’s manufacturing may be a canary in the coal mine, and another two or three months of moderating numbers will almost certainly mean that trouble in Europe is spreading rapidly.

Douglas A. McIntyre