U.S. Manufacturing, Japan GDP Falls despite Inflation Strength

Manufacturing is falling in parts of America and the trend may spread to the entire country, while in Asia Japan sees a fall in GDP and faster inflation.

In America, the Empire State Manufacturing Survey saw the index fall to -14.9, falling by over 50% from the prior reading. This was the lowest the index has been since 2009 at the height of the Global Financial Crisis.

Manufacturing is falling in parts of America and the trend may spread to the entire country, while in Asia Japan sees a fall in GDP and faster inflation.

In America, the Empire State Manufacturing Survey saw the index fall to -14.9, falling by over 50% from the prior reading. This was the lowest the index has been since 2009 at the height of the Global Financial Crisis.

Every indicator within the index was either negative or weak. New orders fell to -15.7 and shipments fell to -13.8 in what the in New York Federal Reserve is calling a “marked decline in both”. Inventories fell to -17.3, while selling prices were flat. Similarly, labor levels and hours worked were roughly unchanged.

Thirty-four percent of respondents to the New York Fed’s business activity survey said business conditions had worsened, causing “a substantial decline in shipments,” according to the Fed.

Weak demand is not the only issue for manufacturers. With flat prices and higher input costs, businesses reported difficulties in profit sustainability. Prices paid by manufacturers rose slightly, with the price paid index at 7.3, a small decline from the prior month.

U.S. Treasuries fell sharply on the news with 10-year Treasury yields declining by five basis points in morning trading.

Japanese Weakness

While New York manufacturers are suffering, Japan saw its economy shrink in the second quarter of 2015, although the decline was not as bad as analysts had expected.

In total, the Japanese GDP fell 1.6% annualized in the second quarter, better than the 1.9% projection from analysts.

However, some analysts warn that the conditions for Japanese consumers are much worse, as the economy appears to be “at the start of a full-scale reflationary phase,” as one investment bank wrote in a note to investors. Excluding the fall in oil, which is causing the cost consumers pay for goods and services to remain soft, Japan is seeing a reflationary trend. According to one investment bank, this could help Japan see stronger growth later in the year. “Wage increases and strong nominal GDP growth should lead to reflation of the economy [later in 2015],” wrote one bank.

BOJ Doubts

Despite the confidence from investment bankers, the Bank of Japan has expressed doubts that its current monetary policy will see a return to inflation later in the year.

According to Bank of Japan Governor Haruhiko Kuroda, “some board members” were cautious about inflation, believing that the 0.1% year-over-year gain of consumer prices in May is not enough to create a sustainable inflationary trend.

The Bank of Japan is currently engaged in a quantitative easing program that purchases 80 trillion yen ($643 billion) of bonds per year.