Many Americans are using the July 4 holiday as an opportunity to get away for the week, and there’s no better time to hide from dour headlines blanketing the financial press. Unemployment has hit a new record high in Europe, and while some progress was made in last week’s euro-zone summit, the continent’s leaders still lack a credible and cohesive plan to stop the death spiral of economic contraction and ever higher debt loads.
But even as fears of recession plague Asia and Europe, America had been fortunate enough to show consistent, albeit slow, job and GDP growth. But new manufacturing data released yesterday has many economists and pundits worried that the European crisis has finally washed up on American shores. A survey from the Institute for Supply Management (ISM) showed that manufacturing activity contracted in June, with its measure of new orders showing a steep decline into contraction as well.
Manufacturing had been one of the lone bright spots in an otherwise weak recovery, and such a steep drop in activity in the sector is a bad omen for the broader economy. Steven Blitz of ITG Investment Research believes as much, telling the Wall Street Journal:
“Assuming the pace of decelerating activity continues, and we make that assumption, it is only a matter of time before the service sector mirrors the real goods slowdown and overall employment gains move from sluggish to worse. The markets can continue cheering each new policy initiative adding liquidity to the capital markets, especially in Europe, but today’s ISM data proves out the bigger issue — insufficient demand for credit rather than an insufficient supply.”
But another competing report suggests that the dire results from ISM may have overstated the drop in manufacturing activity. The financial-information-services company Markit released its own report showing that while the sector’s growth slowed in June, it is not yet contracting. Conor Dougherty of the Wall Street Journal’s Real Time Economics blog posts that Markit’s numbers indicate that the ISM report contained some statistical noise. That said, both reports point to a troubling slowdown in manufacturing. Dougherty writes:
“None of this is to suggest all is well in manufacturing — both reports showed distinct slowdowns in factory activity, a worrying trend since manufacturing and exports have been stalwarts of the recovery.”
The stock market, at least, is taking a wait-and-see approach. Though stocks tumbled on the release of the report, they wandered higher throughout the day. But it is unclear how long the U.S. can withstand continued contraction in Europe and elsewhere. The blog Zero Hedge posted an analysis of global manufacturing numbers from Bank of America, showing that 17 of 24 countries are reporting a contraction in that sector. The news is not good and, according to the bank, “The ongoing sovereign-debt and banking crisis continues to weigh on the region’s economic activity and sentiment. The euro area slowdown is beginning to impact the rest of the world.”