Global Manufacturing Slump: Doom for the Economy?

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Nissan Motor employees assemble vehicles at the Oppama plant in Yokosuka city, suburban Tokyo on July 2, 2011. Nissan started factory operation on Saturday and Sunday from this month as Japan Automobile manufacturers Association agreed to close their factories on Thursday and Friday for power saving since the expected power shortage in the wake of the March 11 earthquake and nuclear disaster. (Photo: Yoshikazu Tsuno / AFP / Getty Images)


Markets cheered the last-minute arrival of a debt deal in Washington. But beneath those relieving headlines was some much grimmer news: manufacturing around the world, the lifeblood of the global economy, is in the dumps.

In July, factories in Asia and Europe grew at the weakest rate since mid-2009, according to business surveys of manufacturing activity just released. The purchasing managers index for China, the engine of global growth, dropped to its lowest level in more than two years. Europe, still embroiled in its own debt debacle, reported its worst manufacturing numbers since September 2009. And to top it off, U.S. manufacturing, which had been a rare bright spot for the U.S. recovery, grew at it slowest pace in two years.

Those grim figures, coupled with meager growth in U.S. GDP in this year’s second quarter, are a humbling reminder of the many problems — aside from the much-hyped U.S. debt ceiling showdown — still plaguing the global economy. After its initial bout of euphoria, Wall Street fell 1% upon mulling the remaining uncertainties surrounding the debt deal and the bad manufacturing news. So what caused the global manufacturing slump, and will the doldrums continue?

The tsunami in Japan is partly to blame for glum readings in the U.S. The pullback in auto parts supplied by Japan has been slowing production lines for U.S. automakers, which had been helping to drive the U.S. recovery. Debt ceiling jitters may also have contributed, as some businesses in the U.S. manufacturing survey said they were worried about government contracts being scrapped or delayed. And of course, American consumers are nervous about spending, which is perhaps the most troublesome part, since it’s not just the U.S. economy that relies on the trusty American spender. The rest of the world does, too.

(MORE: Does the Debt Ceiling Make Deficits Worse?)

In China, the problem facing manufacturers and consumers alike is overheating. Loose monetary policy in the U.S., coupled with over-investment in China, has led to troublesome levels of inflation. The government’s efforts to put out the fire — by raising interest rates and bank reserve requirements — is making borrowing and spending for businesses and consumers more expensive. And again, when the U.S. consumer buys less, the Chinese economy suffers. Other economies are suffering from similar problems. A weak U.S. dollar has flooded currency markets in countries like Brazil and Japan, raising the values of their currencies and making their exports more expensive. As for Europe, belt-tightening in debt-riddled countries like Greece and Spain is dragging down demand for products in manufacturing hub Germany.

(MORE: Will Small Businesses Squelch the Recovery?)

Whether the global slowdown will continue is anyone’s guess. Some analysts think U.S. manufacturing will rebound, since, while businesses haven’t been spending on jobs, they’ve continued to spend on equipment and upgrading their operations. But the real question is: who’s going to buy the stuff? Global consumer confidence is at a lower level than it was at the height of the global recession in 2009. U.S. consumer spending dropped for the first time in two years in June. And the pessimism is only bound to increase as bigger fiscal cuts in Europe and the U.S. take their toll on the world’s biggest spenders. Looming debt downgrades for Europe and the U.S. could make life even harder for their businesses and consumers by increasing costs. If there’s one saving grace for the U.S., it’s that, for at least the next decade, it will continue to hold the world’s reserve currency, which will make U.S. borrowing and investing relatively cheap.

That is, unless the countries holding that currency — especially big holders like China and Japan — lose confidence in our economy more quickly than we imagine.

Roya Wolverson is a writer at TIME. Find her on Twitter at @royaclare. You can also continue the discussion on TIME’s Facebook page and on Twitter at @TIME.

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