March 1, 2013 / 5:40 PM / 5 years ago

GLOBAL ECONOMY- U.S. factory activity jumps as Europe, China struggle

* U.S. ISM manufacturing index at 54.2, highest since June
    * German factories grow, rest of Europe falls further behind
    * Slack demand drops Chinese output to 5-month low
    * UK manufacturing shrinks unexpectedly

    By Steven C. Johnson and Jonathan Cable
    NEW YORK/LONDON, March 1 (Reuters) - U.S. manufacturing
activity expanded last month at its fastest clip in 20 months
but Asian factories slowed and European output fell, indicating
the U.S. recovery remains on more stable footing than the rest
of the world's major economies.
    In the United States, rising demand lifted the Institute for
Supply Management's factory purchasing managers index to its
highest since mid-2011, helping the sector regain some momentum
lost in the second half of last year. But a wild card in the
U.S. recovery is the onset of wide-ranging federal spending cuts
scheduled to kick in soon.
    It was a different story elsewhere, as weak demand at home
slowed the pace of growth in China's dominant manufacturing
sector to multi-month lows while all but two members of the
17-country euro zone saw manufacturing contract.
    "It's doubtful we'll see Europe emerge as a major global
growth engine this year, therefore the burden is on the United
States and Asia, China in particular," said Dean Maki, chief
economist at Barclays Capital in New York.
    A separate survey from financial information firm Markit
showed U.S. factory growth slowed a bit in February even as a
rise in new orders helped output grow at its fastest pace in
nearly a year. 
    U.S. consumer confidence also rose in February as Americans
were more optimistic about the job market. 
    The U.S. economy nearly flatlined in the last three months
of 2012 but was likely to rebound in the first quarter, with
economists expecting growth of 1.8 percent 
    But government belt-tightening in the United States could
complicate things, particularly if $85 billion in broad spending
cuts are allowed to go ahead. 
    If that happens, the International Monetary Fund said it
would likely cut its growth forecasts for the U.S. and world
economies. The IMF has the United States growing 2 percent this
year and the global economy 3.5 percent. 
    Manufacturing in Canada grew at its fastest pace in five
months in February, though that was blunted by data showing the
broader economy grew just 0.6 percent in the fourth quarter, its
worst quarterly performance in more than a year. 
    Mexican factories' output grew at the slowest clip in more
than a year in February while Brazil's manufacturing sector
expanded for a fifth straight month.
    U.S. stocks were little changed and European shares
 slipped, weighed down partly by worries about global
    Economists hope Asia will continue to contribute positively
to global growth, though data on Friday was a setback. 
    China's official purchasing mangers index from the National
Bureau of Statistics eased to 50.1 after seasonal adjustments in
February, the weakest reading in five months and just above the
50-point level separating growth from contraction.
    A second PMI issued by banking group HSBC fell to a
four-month low of 50.4 after seasonal adjustments, off January's
two-year high and in line with a flash, or preliminary, reading
late last month.
    But the bigger-than-expected retreat in the purchasing
managers' indexes does not signal China's economy is slipping
into another slowdown, analysts said. Instead, they show China's
growth recovery this year would be mild, as widely expected.
    "Today's data point to a stabilisation of economic
activities in coming months, not a strong recovery of growth,"
said Jian Chang, a Barclays analyst.
    Incoming European data certainly is not making life easier
for euro zone policymakers. Germany, the bloc's largest economy,
and Ireland were the only two members to see factory output grow
last month.
    German retail sales also grew at the fastest monthly rate in
more than six years in January, rebounding from a deep fall in
    But Markit's euro zone manufacturing PMI was unchanged at
January's 47.9, held back by dismal performances in France, the
bloc's No. 2 economy, Italy and Spain. The survey showed
manufacturing shrank for the 19th month running. 
    "Most of it is driven by Germany. Germany has outperformed
the rest of the euro zone for quite a while now and that
divergence is going to persist," said Evelyn Herman at BNP
    Britain saw manufacturing contract unexpectedly in February
as new orders dwindled, making it likely the sector will drag on
economic growth in the first quarter in a country at risk of
sinking into a triple-dip recession. 
    Chances are rising that the Bank of England will rekindle
its asset purchase program next week, a possibility boosted by 
figures showing mortgage approvals for home buyers dropped in
    In the euro zone, some 44 out of 55 economists polled by
Reuters said the European Central Bank would have to step in and
buy bonds from its struggling members.  
    Inflation among the countries using the euro fell to 1.8
percent last month, according to official data released on
Friday, while unemployment hit a new high in January of 11.9
percent, official data showed. The manufacturing surveys pointed
to factories reducing headcount for the 13th straight month.
    In South Korea, trade data showed a sharp fall in exports,
while a PMI report from last year's emerging market investor
favorite Indonesia showed a slight improvement in manufacturing
overall, but a fall in new export orders.
    Factory growth was stronger in India, which is struggling to
escape the grip of its weakest economic growth in a decade, but
there too the strength came from domestic demand, with export
orders remaining subdued.

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