Date: Wednesday, March 3, 2021
Source: Wall Street Journal
China’s manufacturing sector grew at a markedly slower pace in February than the month before, surveys released over the weekend suggested, even as similar indicators in the U.S. are signaling rapid growth. The weakness in China is likely only a blip, but if its export orders don’t recover in March and April, that could signal the nation’s economy is cooling more quickly than many anticipated.
Chinese purchasing managers indexes have been trending lower since December when officials mandated new lockdowns in some northern cities to contain a rash of coronavirus outbreaks there. February’s service sector PMI was expected to be weak because officials have been exhorting citizens to stay at home during the Lunar New Year holiday this winter rather than travel to see relatives. No surprise then that spending on things like train tickets would be weak.
What did surprise economists was the weakness in February manufacturing. Many had believed that it would actually be stronger than usual this year because migrant workers who normally head home were staying on the job. No such luck: The headline factory PMI drifted down to 50.6 from January’s 51.3, still indicating an expansion in business activity, but the weakest one since last May. The new export orders subindex fell below 50, signaling contraction for the first time since last August.
Part of the explanation may be seasonality; the shifting dates of the Lunar New Year holiday make adjusting indexes for seasonal distortions tricky. But the strong rebound in global trade in late 2020 likely also weakened marginally in early 2021. China has yet to release its trade data for January or February, but South Korean export growth slowed in those months.
Additionally, in January there was a narrowing of the big gap that had developed between the strength in factory orders and factory production in the U.S., according to PMI data from the Institute for Supply Management. Demand for goods growing at a much faster pace than U.S. factories’ production has been a main factor driving the surge of Chinese exports in recent months.
That narrowing looks like it was temporary, however: The ISM’s February manufacturing report, released on Monday, showed a big pickup in U.S. factory production—and an even bigger pickup in the pace of new orders.
With U.S. manufacturers struggling to fill inventories depleted during the pandemic, another big round of stimulus on the horizon and a U.S. household saving rate that is already very elevated, it seems likely that U.S. factories will keep struggling to keep up with demand for most of 2021.
That in turn will lend support to Chinese exports. The Covid-19 flare-ups in northern China that prompted new lockdowns now also appear to be mostly under control. China’s economy slipped a bit in February and its March trade data will be well worth watching. But for now, the most likely scenario is that this proves to be a blip and the country’s economy keeps expanding quickly through 2021.