The global stock sell-off that followed hints the Federal Reserve may trim its stimulus soon underscored how much the prior rally wasn't based on economic fundamentals, which, data Thursday showed, remain shaky.
Markit's manufacturing gauge for China swung back to contraction in May after six months of tepid expansion. Eurozone private-sector activity shrank at a slower pace but indicated the recession will continue into Q2. U.S. factories grew more slowly as exports fell.
The reports came a day after Fed chief Ben Bernanke told Congress that bond purchases, or quantitative easing, could be scaled back "in the next few meetings" if the labor market keeps improving. Minutes from the Fed's last meeting revealed several officials are willing to cut QE as soon as June.
The weak China data triggered a 7.3% plunge in Japan's Nikkei stock index, its worst drop since the 2011 earthquake and tsunami. Exchanges across Europe lost more than 2%.
U.S. stock indexes, which sold off Wednesday, opened sharply lower but quickly pared losses.
Compared with other top economies, fundamentals have been stronger in the U.S. New-home sales rose more than expected last month, but Fed easy money has been a big catalyst for housing. New jobless claims fell sharply last week, though hiring has changed little over the past year.
Fed officials tried to massage QE expectations Thursday by again stressing their flexibility.
St. Louis Fed President James Bullard, who sits on the policy committee this year, suggested monthly bond buys could rise if the economy weakens and deflation risks grow.
San Francisco Fed President John Williams, who isn't a policymaker, said the central bank could boost QE after any reduction, if subsequent economic data point to renewed softness.
"Even if we do adjust downward our purchases, it doesn't mean we're now in some autopilot," he told Bloomberg. "You could even imagine a scenario where we adjust it downward based on good data and then adjust it back.
Payroll tax hikes and federal budget cuts are taking a toll on U.S. growth and job creation.
Markit's U.S. manufacturing index fell to a seven-month low of 51.9 in May from 52 in April, as output and employment slowed. Readings above 50 indicate expansion. Orders picked up, but export demand turned negative.
"With employment growing at the slowest rate since last October, the survey suggests that the Fed cannot risk tapering its stimulus any time soon," said Chris Williamson, Markit's chief economist, in a statement.
A Chinese manufacturing gauge hit a seven-month low, falling to a contractionary 49.6 from 50.5, on lower domestic and overseas demand. Jobs shrank at a faster pace. Markit said growth looks to decelerate further in Q2.
While contraction in the eurozone's manufacturing and service sectors eased in May, the currency union's recession will likely extend to a seventh straight quarter in Q2.
Businesses cut prices further, adding to deflationary pressure. The European Central Bank's quarter-point rate cut hasn't lifted confidence, which actually worsened in the service sector, suggesting policymakers must do more, Markit said.