In favor of manufacturing

It looks like the age of manufacturing has come back at last after its long losing battle against service industry, especially finance. Recent results in Purchasing Manager's Index or PMI, which captures current business condition, showed more bright pictures for manufacturers in the US, the UK, and China, indicating that unexpected recovery led by manufacturing now under way is strong enough to maintain the economy for some time.

However, one has to understand that the reason of a sharp recovery is not the same across the three countries. Meanwhile, major central banks are in no mood to rush to an exit strategy, taking on disinflation or deflation with another round of quantitative easing at hand. Let's look at one by one. The keyword is "Global rebalance".

According to a Bloomberg report, manufacturing picked up a sudden momentum in October in the UK, a country known for its finance-centered economy.

U.K. manufacturing growth unexpectedly accelerated in October and hiring improved as export orders increased.

A gauge based on a survey of companies by Markit Economics and the Chartered Institute of Purchasing and Supply rose to 54.9 from 53.5 in September, according to an e-mailed statement today in London. The median forecast of 25 economists in a Bloomberg News survey was for a decline to 53. A measure above 50 indicates expansion.

Manufacturing is gaining traction after a drop in the pound since the start of 2007 boosted demand for British exports, and economic growth in the second and third quarters was the strongest for two consecutive quarters since 2000. Still, the Bank of England will probably keep its asset-purchase program at 200 billion pounds ($322 billion) this week as the government prepares the biggest public-spending cuts since World War II.

"Exports are very much the engine of growth within manufacturing at the moment," David Noble, chief executive officer at CIPS, said in the statement. "It's difficult to predict the impact of fluctuations in export markets so the recovery may continue to be bumpy. What is clear is that manufacturing looks set to drive further gross-domestic-product growth in the fourth quarter."

The pound rose as much as 0.3 percent against the dollar after the report was published, and traded at $1.6086 as of 9:32 a.m. in London.

Employment Boost

Glasgow, Scotland-based Weir Group Plc, the world's biggest maker of pumps for the mining industry, said today it expects profit for the fiscal year 2010 will be slightly ahead of previous forecasts.

New export orders rose at the fastest pace in five months in October, CIPS said, with companies reporting sales increases to Europe, Latin America, the Middle East and Africa. Employment rose at the fastest pace since June, while average input costs rose for a 14th month.

The U.K. economy grew 0.8 percent in the third quarter, double the forecast of economists in a Bloomberg survey. Growth was 1.2 percent in the second quarter, the fastest in nine years.

"This report confirms that the improving picture painted by last week's good GDP data has continued into the final quarter," James Knightley, an economist at ING Financial Markets in London, said in an e-mailed statement. "With the pain yet to bite from government spending cuts, we remain cautious and see growth slowing through 2011."

The government's spending reductions will eliminate 490,000 jobs in a bid to wipe out a record budget deficit by 2015. The cuts will peak at 81 billion pounds in 2015.

Thirty-eight economists in a Bloomberg News survey forecast the Bank of England will maintain the size of its bond-purchase plan, while two predict increases. All 60 economists in a separate poll say the bank will keep the benchmark interest rate at a record low of 0.5 percent. The bank announces the decision at noon in London on Nov. 4.

One might find it difficult to locate where 'Made in UK' products are sold outside the country. Aside from it, this result has two important implications, which would be a harbinger of transformation in the economy.

First, manufacturing is finally gaining its ground in the country, which has lost factories to overseas and deferred to finance over the years. According to ONS, manufacturing GDP lost its value in the last 20 years, while business service GDP has kept expanding by 3.8% per annum.

Second, exports could contribute to the economy more profoundly than before, reflecting weaker domestic demands. The share of exports in GDP, though not yet restored the pre-Lehman shock level, is gradually soaring since the mid-2009, in part due to weak pounds.

The UK is far away from rebalancing its economy, but those two features can be a sign for the country tilting toward a more manufacturing- and export-driven nature.

Rebalance needs a partner to offset a country's surplus or deficit. The world's biggest surplus country, in turn, showed the acceleration in manufacturing driven by internal demand amid subdued exports.

The official purchasing managers' index (PMI) rose to 54.7, from 53.9 in September and 51.7 in August. Readings above 50 indicate expansion.

The result was driven by rising transport and general equipment orders, thanks to strong state-sponsored investment in infrastructure.

The trends were confirmed by a separate report from HSBC bank.

Like the official PMI from the China Federation of Logistics Purchasing (CFLP), the HSBC report on China produced by data services company Markit "suggests strong growth momentum in domestic demand," said HSBC chief economist for China, Qu Hongbin.

He predicts a 9% growth rate in the fourth quarter - moderately slower than the 9.6% already announced for the third quarter - despite the "still soft increase in new export orders".

Price pressures

The official CFLP report has remained above 50 - indicating expansion of the manufacturing sector - for all of the last 20 months, as the government pushed an investment splurge to offset the effect of the global recession.

Spending on new projects in the first nine months of this year was up 25% on a year ago.

The data was particularly strong as it coincided with an annual week-long national holiday, which normally causes a small drop in the index during the month of October.

Stock markets reacted well, with the Shanghai Composite index ending the day up 2.5%, while Hong Kong's Hang Seng rose 2%.

But it will add to concerns about rising inflation at China's central bank.

The People's Bank of China raised interest rates by 0.25% last week, in the hope that - along with moderate strengthening of the yuan - this may stabilise rising prices.

However, the CFLP report showed that manufacturers continue to report a high and rising cost of raw materials, particularly for cotton and rubber.

Contrasting fortunes

Data from other big Asian economies gave a more mixed picture.

Like China, India saw further growth in manufacturing in October, according to HSBC.

The bank's PMI for India rose to 57.2 from 55.1 the month before.

As with China, the expansion was fuelled by growing domestic demand, while exports remained relatively subdued.

South Korea and Japan in contrast showed further signs of a possible contraction.

In Japan - where the government warned last month of an economic standstill due to the strong yen - car sales fell 27% compared with a year ago, to their lowest October level on record.

The drop was in part due to the expiry at the end of September of a government subsidy for environmentally friendly cars.

Meanwhile, South Korea's manufacturing PMI, also commissioned by HSBC, fell to 46.7 in October from 48.8 in September, indicating that the sector's contraction steepened in the month.

While current exports have risen some 30% over the last year, the survey indicated that new export orders for Korean firms contracted in October for the first time since February last year.

Note, again, that China's expansion "was fuelled by growing domestic demand, while exports remained relatively subdued." The country is notorious for its export-driven economy powered by the cheap currency, condemned by some as one of the main culprits of global imbalance which is widely believed to give birth to the current recession. Unfolded in the recent PMI reports is, however, an economy transforming itself to extend domestic demand instead of searching for foreign markets.

Manufacturing activity also expanded in the world's largest deficit country, the US, in October. It's no doubt that the cheap dollar is playing a major part to enhance manufacturing through exports.

Manufacturing activity expanded last month at the fastest pace since May, driven by demand in the United States and abroad for cars, computers and other goods. 

The report signals that U.S. factory output, which slowed over the summer, remains a strong player in an otherwise weak economy. A separate report on Monday showed that manufacturing in China, the world's second-largest economy, also grew.

The Institute for Supply Management said Monday that its manufacturing index read 56.9 in October, up from 54.4 in September. It was the 15th straight month of growth. A reading above 50 indicates growth.

"This was a very positive report, and it suggests that the U.S. manufacturing sector is beginning to reap the benefits of the weak dollar," Eric Green, an economist at TD Securities, wrote in a note to clients. A weak dollar makes U.S. goods cheaper overseas.

Manufacturing helped drive the U.S. economy out of recession last year, but growth had slowed in recent months. The ISM's manufacturing index rose to 60.4 in April, the highest level since June 2004. The index had bottomed out at 32.5 in December 2008, the lowest since June 1980.

The jump in October could ease concerns that companies are almost through rebuilding their stockpiles — a trend that appeared to be slowing factory output growth in recent months.

"The U.S. manufacturing sector is getting a second tail wind," Green said.

Manufacturing activity in China also improved last month. A survey affiliated with the government said its measure rose to 54.7 in October from 53.8 in September.

Brian Bethune, an economist at IHS Global Insight, said China's growth is important for the U.S. economy. China's manufacturing sector is key to the rest of Asia's economy, and the region as a whole is a leading destination for U.S. exports.

Still, much of the U.S. economy's health depends on consumer spending and the gains in manufacturing can't be sustained unless that picks up.

The dollar has been weakened by the Fed's ultra loose monetary policy, sending the yen to nearly a 15-year high. A cheap currency surely helps boost exports,

which leads manufacturing activity to compensate for declining imports due to soft domestic demand. The US, along with the UK,  is on the way to rebalance the economy with benefit of weak dollars.

All results above indicate that rebalancing is under way among major economies, but questions remain on how to stop competition for cheaper currencies to keep afloat.