Industry Crib Sheet: China Manufacturing Expands Modestly in September
IMT Staff posted on September 30, 2014 | 7213 views

China, Manufacturing, Finance, Machinery, ThomasnetChina’s manufacturing sector gained slightly in September on new domestic and export orders and beat economists’ expectations despite factory employment falling to a 5-1/2-year low.

The Flash China Manufacturing PMI published by HSBC in conjunction with Markit Economics rose 0.3 points to 50.5. The PMI’s production sub-index, measuring the sector’s output, remained at 51.8, the same reading in August. Readings over 50 signal expansion, while readings below mean contraction.

The September flash reading represents about 85 to 90 percent of mostly small and midsize Chinese manufacturers that participate in HSBC’s monthly survey. HSBC will release final September PMI data on Tuesday, Sept. 30.

“September’s modestly better flash PMI report is consistent with further improvement in China’s export markets,” said Bill Adams, senior international economist for PNC Financial Services, in a Forbes report on the September estimates. “At the very least, the manufacturing PMI signaled no deterioration from August. China is not going off a cliff.”

However, it has been an inconsistent year for China’s manufacturing sector. Factory business contracted during most of the first half of the year, then picked up significantly in June and July to reach an 18-month-high, but slowed back back down to a marginal growth pace over the last two months.

“The picture is mixed, with new orders and new export orders registering some improvement,” said Hongbin Qu, HSBC’s chief economist for China and its co-head of Asian Economic Research. While Qu said manufacturing is at “modest expansion” levels, he noted that the biggest risk to China’s economy remains the domestic property downturn in the country, and expected the central government to implement more monetary easing measures.

Polls by both Bloomberg and Reuters showed economists expected a median reading of 50 for China manufacturing in September, as business confidence continues to slide as a result of  the country’s weakened residential real estate market and retail sales. However, a separate report by Bloomberg said corporate profit margins and hiring at Chinese companies has fared better despite China’s economy being stuck “in low gear.” Many analysts therefore don’t foresee drastic new stimulus measures from the Chinese government.

Still, Chinese factory payrolls have shrunk throughout most of this year, according to HSBC data. Yet while the PMI’s employment sub-index dropped to its lowest reading since February 2009, order backlogs climbed significantly, suggesting factories could soon be pressured to replenish payrolls to work through orders.

Meanwhile, according to Markit Economics, U.S. manufacturing this month grew at the same high pace as in August, and employment growth in the sector hit a 2-1/2-year high on strong rises in output and new orders.

The Flash U.S. Manufacturing PMI remained at 57.9 for September, the same as Markit’s final August reading, which was revised marginally from a 58.0 flash reading last month. Markit’s measure of U.S. manufacturing is at its highest level since April 2010.

Over the third quarter, the PMI averaged 57.2, which is the highest seen in any quarter since Markit began its survey in 2007. The output sub-index reached 60 in September, while the employment sub-index surged to 57, the fastest rise since March 2012.

The employment spike is an indication U.S. manufacturers are hiring to tackle huge workloads being generated by both existing backlogs and new orders. September data pointed to one of the strongest increases in new orders since May 2007, supported by strong export orders for the second consecutive month.

“The flash PMI signaled another month of impressive growth of the U.S. manufacturing economy,” said Chris Williamson, Markit’s chief economist. “We expect GDP to grow at least 3 percent and as much as 4 percent,” he said for the third quarter.

Meanwhile, the Institute for Supply Management (ISM) is expected to release its September manufacturing PMI data on Wednesday, Oct. 1.

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Equipment Finance Firms Await Upturn

Confidence among equipment finance business leaders rose in September in anticipation of a seasonal upswing in demand for loans and leases to fund capital investments as well as businesses replacing old and outdated equipment before the year is out, even as more expect economic conditions to worsen in the coming months.

The Equipment Leasing & Finance Foundation’s Monthly Confidence Index for the Equipment Finance Industry (MCI-EFI) improved 1.3 points from August to 60.2, rebounding from a seven-month low in July.

The foundation’s September data continued the ragged path the MCI-EFI has taken all year. The number of executives in the survey who said they believe business conditions will improve over the next four months doubled from 18.2 percent in August to 36.4 percent, wiping out the previous month’s 10-point drop. The number of survey respondents who expect demand for equipment loans and leases to pick up in the next four months similarly rebounded 9.1 points to 30.3 percent.

The equipment finance industry expected a banner year for 2014 in new financing activity as companies put another post-recession year behind them and showed early-year confidence in making capital expenditures. While business spending has sustained this year, year-to-date volume in new equipment loans and leases is running 6 percent higher than last year, the Equipment Leasing and Finance Association, the foundation’s parent organization, said in a separate report.

“Solid” was the term ELFA President and CEO William G. Sutton used to describe the year thus far, while adding that increased consumer spending, an improving labor market, and low interest rates all bode well for rising business investment.

According to ELFA’s Monthly Leasing and Finance Index, August new-business volume was $7.2 billion, up 13 percent from August 2013. Month over month, new business volume was down 9 percent from July. The index reports economic activity from 25 companies representing a cross-section of the equipment finance sector.

“As we approach the fourth quarter, I am hopeful an improving economy collides with our typical seasonal upswing in new business activity,” said Thomas Jaschik, president of BB&T Equipment Finance.

While an August downswing followed by an early fall rebound is not unusual, equipment finance executives are pinning their hopes on a fourth-quarter surge in equipment replacement activity. “While the consumer and commercial sectors are still suffering from a hangover from the Great Recession, even after five years, the aversion to debt will slowly succumb to the need to upgrade and replace equipment,” said Paul Menzel, president and CEO of Financial Pacific Leasing.

In the metal cutting industry, for example, the trade group Association For Manufacturing Technology says the average age of capital equipment such as machine tools is over 20 years old. The association is expecting manufacturing businesses to increase their equipment purchases in the coming months, following the International Manufacturing Technology Show it staged in Chicago earlier this month which featured many machinery debuts.

Strong continuing demand for goods is also pushing businesses to modernize their production equipment and machinery. “Businesses are beginning to invest in new equipment to increase capacity, not just to replace aging equipment,” said Elaine Temple, president of BancorpSouth Equipment Finance. “For the past two years, the majority of purchases were replacement, not expansion.”

But Temple added that the recovery “continues to be slow,” reflecting the cautious view industry members have of the economy, as evidenced by the doubling of the number of respondents in the September EFI-MCI survey who believe economic conditions will worsen.

Larry R. Stevens, president and CEO of Med One Capital, which makes loans and leases in healthcare equipment, remains positive. “If the month-to-month trends continue for the remainder of 2014, our industry will experience the strongest new business performance since well before the beginning of the recession,” he said.

Far East, China Lead Machinery Production

The Western Hemisphere trails Europe and Asia-Pacific in the global share of machinery production and that share is expected to dip over the next four years.

According to data by research firm IHS, the Americas produced 21.7 percent of the world’s industrial machinery in 2013. This was less than half of the 45.4 percent share commanded by manufacturers in Asia-Pacific. Europe controlled 32.9 percent of the world’s machinery output.

By 2018, Asia-Pacific is expected to raise machinery production to nearly half of the world’s total. The Americas’ share, meanwhile, is expected to shrink slightly to around 20 percent.

China was the world’s leader by nation in industrial machinery production last year, generating 28 percent, or $430 billion, of the world’s volume, ahead of the United States’ 17 percent share, or $258 billion. Japan and Germany followed, with 10 percent and 9 percent share, respectively.Of the approximately $1.6 trillion of machinery produced around the world in 2013, the two most prolific types were materials handling and agricultural machinery, accounting for 12.9 percent and 11.1 percent, respectively, of all machinery. Agricultural machinery currently has the highest compound annual growth rate of all machinery types, with a CAGR of 7.4 percent through 2018, according to IHS data.

That is followed by materials handling and packaging machinery, with each expected to grow 5.5 percent per year over the next four years. Machine tools, currently a $95 billion global market led by Asia-Pacific manufacturers with a 59 percent market share, are forecast to just grow 2 percent annually through 2018. In fact, machine tools have the lowest CAGR forecast of all machinery types analyzed by IHS, including machinery for making paper and paperboard, rubber and plastics, and textiles.

Meanwhile, robotics, which currently make up less than 1 percent of the world machinery in use, are expected to expand by 2.4 percent annually through 2018, driven by the convergence of operational and information technologies in a variety of industrial sectors.

IHS is forecasting that industrial organizations will spend more than $185 billion this year on automation and related equipment. About 31 percent of that will be in automation equipment, while 40 percent of the total will be in motors and motor controls and another 29 percent will be in power transmission equipment.

Industrial automation equipment is growing globally at 3.1 percent per year. Use is about equally divided between discrete manufacturing and the process industries, at 45 percent and 41 percent, respectively. This year, sales of the equipment are about evenly split between the Americas and Asia-Pacific, followed by Japan and then Europe, Middle East, and Africa.

Among equipment segments, motors and generators make up the largest share, at more than a quarter of the world market (26.4 percent). Linear and fluid power products were the next biggest area, with a 20.3 percent global share. While rotary products currently account for just 9.4 percent of the market, IHS data points out that they possess the highest CAGR of 5 percent through 2017.

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This article was originally published on ThomasNet News Industry Market Trends  and is reprinted in its entirety with permission from Thomas Industrial Network.  For more stories like this please visit Industry Market Trends. 

 

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