S&P Global April Manufacturing PMI at 49.9 Indicates 'Contraction'
The U.S. manufacturing sector contracted for the first time in four months. The decline in new orders has led to a slowdown in employment, prompting analysis that the robust U.S. economy has somewhat lost its growth momentum entering the second quarter. Amid signs of economic slowdown, expectations for potential interest rate cuts have revived, causing government bond yields to fall.
On the 22nd (local time), S&P Global released the preliminary U.S. Manufacturing Purchasing Managers' Index (PMI) for April, which dropped to 49.9 from 51.9 the previous month. It also fell short of the expert forecast of 52.
The manufacturing PMI, a key leading economic indicator, signals expansion when above 50 and contraction when below 50. After entering an expansion phase by surpassing 50 since January, the U.S. manufacturing sector has returned to contraction territory for the first time in four months.
The services PMI continued to expand at 50.9 but was below last month's 51.7 and the forecast of 52.
Consequently, the composite PMI, which covers both manufacturing and services, fell 1.2 points to 50.9 from 52.1 the previous month. This is the first decline in the composite PMI in six months. Due to wage reductions in the service sector and slowing manufacturing growth, the employment index dropped 3.2 points to 48 compared to the previous month. The decline in the employment index suggests that companies believe current production capacity is sufficient to meet demand.
With the slowdown in U.S. industrial activity growth, the economy is seen as losing momentum entering the second quarter. The U.S. first-quarter Gross Domestic Product (GDP), to be released on the 25th, is expected to show strong growth at an annualized rate of 2.5% compared to the previous quarter. Although this is a slowdown from 3.4% in the fourth quarter of last year, it still exceeds the long-term trend.
Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, stated, "U.S. economic activity lost momentum in early Q2. In April, new business inflows declined for the first time in six months, and concerns about future outlooks increased, causing companies' expected future production levels to fall to the lowest in five months." He added, "As the business environment became more challenging, companies cut wages to levels rarely seen since the global financial crisis, except for a few months during the COVID-19 pandemic."
Due to the contraction in U.S. manufacturing, expectations for potential interest rate cuts have revived, leading to a decline in government bond yields. The U.S. 2-year Treasury yield, sensitive to monetary policy, fell 4 basis points (1bp = 0.01 percentage points) to 4.92%, while the U.S. 10-year Treasury yield, a global bond yield benchmark, dropped 2 basis points from the previous trading day to around 4.6%.
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