| NEW YORK/LONDON
NEW YORK/LONDON The struggles of the U.S. and euro zone economies continued in July, business surveys showed on Tuesday, though improved Chinese factory output suggested stimulus measures may be starting to boost the world's second-largest economy.
Europe's private sector looked set for a prolonged slump as surveys showed the downturn that began in the euro zone's small economies has since become entrenched in Germany and France.
Across the 17 countries that use the euro, the private sector shrank for a sixth straight month in July. Manufacturing output nosedived, particularly in Germany, suggesting recession ahead. <EUR/PMIS>
Europe's malaise also infected businesses across the Atlantic. U.S. manufacturing this month grew at its slowest pace since December, 2010, hobbled by a decline in overseas demand.
Whirlpool Corp (WHR.N), the world's largest appliance maker, cited weak demand in Europe and a stronger dollar for missing market expectations for its quarterly earnings.
Texas Instruments Inc's (TXN.O) beat Wall Street expectations but warned that its third-quarter revenue would be weaker than usual due to global economic uncertainties.
Financial information firm Markit said its U.S. "flash" manufacturing Purchasing Managers Index fell to 51.8 from 52.5 in June, the fourth straight month of slower growth.
Markit's Eurozone Composite PMI, which combines the services and manufacturing sectors and is seen as a good guide to overall growth, held steady at 46.4, but manufacturing was dire and forward-looking indicators were grim.
A reading above 50 indicates expansion in the sector.
"The slowdown in manufacturing is a concern. We are seeing that the effect from Europe is weighing on U.S. manufacturing, and manufacturing is one of the few bright spots in this recovery," said Craig Dismuke, chief economic strategist at Vining Sparks in Memphis, Tennessee.
The news from China was more encouraging, even though manufacturing still contracted this month.
HSBC's Flash China manufacturing purchasing managers index (PMI) rose to 49.5 in July from 48.2 in June, closer to the 50 level that divides expansion from contraction. The increase was driven by a jump in the output sub-index to 51.2 - the best showing since October 2011.
It was the first significant set of Chinese data in the third quarter and suggested a series of policy measures, including interest rate cuts, may be starting to work.
"(The PMI) adds to recent signs of stabilization of the Chinese economy, thus underpinning our view that the slowdown in activity will bottom out over the summer months," said Nikolaus Keis at UniCredit.
Chinese growth in the second quarter cooled to 7.6 percent from a year earlier, its slowest pace in more than three years, but still way ahead of the United States and the euro zone, which has likely fallen back into recession.
For Nomura's chief China economist, Zhang Zhiwei, the PMI provided further evidence that a slowdown in China's economy bottomed out in the second quarter of 2012.
"This suggests the effect of policy easing is being transmitted to the economy and reinforces our view that growth has bottomed in Q2," Hong Kong-based Zhang said.
Manufacturing in Germany, the euro zone's biggest economy, shrank at its fastest pace in more than three years and its service sector also shrank. In France, factory activity fell at its fastest pace since May 2009.
The euro zone composite index has been below the 50 mark for half a year. Data collator Markit said it suggests a quarterly GDP fall of 0.6 percent.
A Reuters poll predicted last week the bloc's economy would shrink by a much more modest 0.1 percent in the current quarter.
The economy shrank 0.3 percent in the second quarter, and another quarter of contraction would thrust it into its second recession since 2009.
Unlike China, forward-looking indicators in the surveys painted a gloomy picture. The business expectations index fell to a level previously seen when the bloc was last in recession.
Companies also cut their work force at the fastest pace since the beginning of 2010.
"When you have all of the fiscal austerity measures ... why would you want to be hiring at this moment? The question is whether or not this is going to be a permanent state," said Sian Fenner at Lloyds Banking Group.
In the United states, new orders for exports fell for a second straight month, the first back-to-back decline in nearly three years, Markit said, as recession in Europe dented demand for U.S. products.
A saving grace for U.S. manufacturers: a modest rise in domestic demand.
"Reassuringly, domestic demand appears to be showing ongoing signs of resilience, encouraging firms to take on more staff," said Chris Williamson, chief economist at Markit.
Even so, economists worry that the broader U.S. economy, which grew at a 1.9 percent rate in the first quarter, has since lost momentum. A poll of 74 economists polled by Reuters expects April-to-June growth to have slowed to a 1.5 percent pace.
That's being reflected in manufacturing, which had been a bright spot for the U.S. economy for most of last year.
As a result, Wall Street expects another round of monetary easing from the Federal Reserve. The median forecast in a July poll of 16 primary dealers showed a 70 percent chance that the Fed would do more to boost the economy.
Earlier this month the European Central Bank cut its main refinancing rate to a record low 0.75 percent and the deposit rate to zero but most analysts see that as a token gesture that can do very little to rekindle economic growth.
A Reuters poll of economists showed the ECB will likely introduce more measures to help stimulate the economy, possibly including more cheap loans for banks. <ECB/INT>
(Additional reporting by Nick Edwards; Editing by Chizu Nomiyama)