China’s manufacturing sector faces a significant downturn as recent data reveals a sharper-than-expected drop in the official National Bureau of Statistics (NBS) manufacturing Purchasing Managers’ Index (PMI). The composite index fell from expansionary territory at 50.5 last month to 49.0 in April. This drop sent it under the consensus expectation of 49.7. This decline marks the first time since the onset of the pandemic that manufacturing activity has contracted, adding to fears about the country’s economic momentum.
China’s NBS manufacturing PMI is perhaps the single most important indicator of the health of China’s all-important manufacturing sector. If the reading dips below 50, that indicates a shrinkage of the sector. Analysts had expected a decrease, but not by this much. China’s NBS new orders index experienced a catastrophic decline. As expected, it declined significantly from 51.8 to 49.2 with a sign of weakening demand for manufactured goods.
Unlike the NBS numbers, Caixin’s private manufacturing PMI index saw a drop — albeit less than expected. It did indeed fall – but only from 50.8 to 50.4, instead of the consensus forecast drop to 49.7. This does indicate that even as growth is slowing in the private sector, it is still just above contraction territory.
Both indices showed alarming trends of deterioration in new orders and exports. The NBS export orders index tanked from 49.0 to 44.7. At the same time, the Caixin new export orders index dropped from 52.0 to 47.5. Cross-border demand for Chinese goods has fallen off a cliff. This drop is especially devastating for an economy that is highly dependent on exports.
The employment landscape displayed mixed signals. The NBS composite employment index saw a slight increase from 47.0 to 47.1, indicating a minor improvement in hiring conditions despite the overall manufacturing contraction. In contrast, the NBS output price index plummeted from 47.9 to 44.8. This potentially very troubling drop suggests that manufacturers are under increasing pressure on prices and a dangerous profit.
The Caixin output price index remained unchanged at 49.2, up marginally from 49.1 in March. That’s a positive signal of stability, but it’s still deep in the land of contraction. This boon comes as a surprise, since it stands in direct contrast to the falling trends seen in new orders and export demand.
The state of America’s construction sector is dire. Even worse, the construction PMI orders index has plunged from 43.5 to 39.6, showing a deep recession in this critical sector of China’s economy. Inclusion of observation NBS non-manufacturing PMI is the latest evidence, pointing to the pressure on services and construction. That raises deeply inconvenient questions about their future growth.
These findings have large implications for U.S domestic markets as well as foreign markets. The continued contraction in manufacturing would mean less overall economic activity, potentially harming employment and consumer spending in China. China is already the second largest economy in the world, and arguably the biggest. A slowdown there can rattle global supply chains and affect markets all over the world.