As the curtain begins to close on the debt-ceiling political theater in which potential disaster was averted, Wall Street’s gaze is now fixed on portents of a global growth slowdown that is reviving fears of recession.
The debt-deal relief rally ended early Monday after the Institute of Supply Management released its manufacturing index, which fell to an anemic 50.9%. Readings above 50 indicate growth and below 50 contraction, so the July figures revealed not just weakness in manufacturing but a marked erosion from June’s 55.3 reading in June.
Further jolting markets, the index of manufacturing activity fell well below consensus estimates of 55 and served as the most recent rebuttal of expectations, or at least hopes, of a strong second half of the year following a disappointing first half. Also, ISM’s New Orders Index registered 49.2, indicating contraction for the first time since June 2009.
The stock market dived last week after a durable goods report showed a 2.1% decline in new orders for June. Economically sensitive durable goods are thought to be a good guide to future economic activity because they include capital goods that companies use in manufacturing.
New orders for nondefense capital goods suffered an even greater decline, 4.1%, in the Commerce Department report released Wednesday. Then, on Friday, the Commerce Department released preliminary GDP results for the second quarter, showing tepid 1.3% growth and revising Q1 GDP from 1.9% down to just 0.4%.
Signs of a slowdown are starker still overseas, meanwhile, as the leading index of Euro zone manufacturing activity fell to 50.4, barely registering a pulse, from 52 in June.
Markit Economics, which publishes the index, said “The slowdown was broad-based, with almost all of the national PMI indices coming in lower than their respective June levels,” meaning that weakness was across the board, including even Germany which was a reserve of relative manufacturing strength earlier in the year.
The news in China, which has become synonymous with manufacturing in today’s globalized economy, was perhaps Monday's most worrisome report. The HSBC China Purchasing Managers’ Index showed contraction in July, falling to 49.3 from 50.1, and registered the lowest reading in manufacturing activity since March 2009. In a summary of Chinese performance, the HSBC survey said, “total new order growth eased to near-stagnation amid reports of lackluster global demand.”
With the economy already heaving under weak housing and construction sectors and now slowing manufacturing, all eyes will be on new earnings reports and a string of government economic reports this week. Of greatest interest perhaps, the Labor Department releases July unemployment data on Friday.
In a bellwether move on both these fronts–earnings and employment– Europe’s largest bank HSBC reported a sharp 36% rise in earnings Monday, but said it would cut 30,000 jobs globally to trim costs and maintain profitability. HSBC also operates 470 branches in 13 U.S. states, most of them in New York. The cuts will affect U.S. branches, though the bank plans to increase hiring in Asia and Brazil.