Markets: News  

Factory flu is global contagion

NEW YORK (MarketWatch) -- Across the world, production lines are shutting down and factory workers' hours are being cut. A dearth of demand has fallen back on goods producers, suggesting the global slowdown will not turn around soon.

Wednesday brought news that factory activity either downshifted significantly or outright contracted in July. The euro-zone factory recession worsened last month. China posted its weakest official manufacturing reading since November. Readings from Australia and the U.K. were the lowest in at least three years. The Institute for Supply Management said the U.S. factory sector contracted for a second straight month.

The culprit for manufacturers is falling demand.

Germany, a factory powerhouse, reported machinery orders fell for a ninth consecutive month. In Brazil, the orders index dropped for the fourth month in a row. In the U.S., new orders dropped for a second consecutive month.

The problem is that falling demand feeds upon itself. Concerns about the euro-zone debt crisis and China's past tightening action to slow inflation have led consumers and businesses around the world to cut their spending. Less global demand leaves less work for global manufacturers who, in turn, order fewer supplies and commodities from other producers.

Bradley Holcomb, who oversees the ISM's survey, suggests future production trends in the U.S. will be determined by the backlog of unfilled orders. But the backlog index has already been contracting for four months running.

The weak state of factories is boosting expectations of central bank action. The Federal Reserve ends its two-day policy meeting Wednesday but economists expect any future action will come later this year. Hopes are higher for the European Central Bank, which meets Thursday, but it is unclear what actions policy makers may initiate.

The problem for the U.S., at least, is that any move by the Fed may do little do boost demand directly. The rise in stock prices that usually accompanies quantitative easing may help consumers and businesses feel wealthier. But unless that euphoria is followed by increases in actual sales and jobs increase, it won't last.