By Ambrose Evans-Pritchard, Feb 3, 2014
“Absolutely awful” factory figures as new orders suffer worst slump since 1980 recession.
Factory orders in the US suffered their steepest fall for 33 years in January and also slowed further in China, raising fresh concerns about the strength of the world’s two biggest economies.
The shock figures set off a renewed flight to safety in New York, where yields on US 10-year Treasuries fell to a three-month low of 2.60pc. The Dow Jones index tumbled 326 points, breaking through crucial technical support levels.
The Japanese yen rallied as funds unwound “carry trade” positions in Asia to reduce risk. Emerging market currencies slumped to a five-year low.
America’s ISM index of supply managers dropped from 56.5 to 51.3 in January, the biggest one-month decline since the Lehman crisis.
Rob Carnell from ING said the survey was “absolutely awful”, with the real worry being a slump in new orders not seen since the recession of 1980.
Analysts said it was unclear whether the collapse could be blamed on polar conditions across the US, or whether deeper forces were at work. There was a sharp slide in orders for machines and white goods in December even before the cold snap.
Stephen Roach, from Yale University, said the robust growth in the US over recent months had been “bloated by an unsustainable surge of restocking”. The underlying rate of growth is closer to 1.6pc, if final sales to consumers and businesses are used as a guide.
Mr Roach said American households had not yet finished the epic purge needed to bring borrowing levels back to historic levels. The debt-to-income ratio has dropped from 135pc to 109pc since the sub-prime bubble burst in 2007 but still has another 35 percentage points to go, implying powerful headwinds for the US economy for years to come. “American consumers’ balance-sheet repair is, at best, only about half-finished,” he wrote on the Project Syndicate blog.
In China, the PMI gauge of manufacturing fell to its lowest level since May as the authorities continued to bear down on the country’s $24 trillion (£14.7 trillion) credit boom. New export orders fell to 49.3, below the expansion line of 50. “We believe the negative impact of tighter liquidity conditions is showing on the real economy,” said Zhiwei Zhang from Nomura.
Morgan Stanley has cut its growth forecast for China to 6.6pc for the first half of 2014, warning that the country may face a rough ride trying to deleverage the economy while at the same time raising interest rates. There are widespread concerns over an estimated $1.1 trillion foreign currency debt owed by Chinese banks and companies, mostly borrowed through Hong Kong and Macau.
The US Federal Reserve insists that America’s growth has reached “escape velocity” as the housing market recovers and the shale gas boom revives large sectors of industry. Yet the picture is murky. The labour participation rate is still at a 50-year low of 62.8pc, evidence of a jobless recovery.
All key measures of the US money supply have been slowing for months. The growth rate of broad M2 measure has halved to around 5pc from 10pc two years ago, signalling a lull ahead.
Tim Congdon, from International Monetary Research, said the Fed’s bond purchases kept the money supply afloat last year as the economy wrestled with deleveraging, leaving it unclear what will happen as the Fed withdraws support. The bank has already pared back its purchases from $85bn to $65bn a month.
Ashraf Laidi, from City Index, said the rare “trifecta” of falling US bond yields, falling equities and flight to the Japanese yen is a classic sign of trouble, a warning that emerging market contagion and slowing US growth are starting to feed on each other.
“An extension of this negative trifecta would deal a serious blow to the notion that Fed tapering remains on autopilot,” he said.