Thursday, July 1, 2010

The manufacturing sector continues to look strong


This market is determined to view the glass as half empty. This morning I saw headlines that said "factory growth weakens," followed by a story that says the "unexpected decline" in the ISM manufacturing index is a reason for the market's decline today. But as this chart shows, the index has merely dropped to a level that is somewhat less than spectacularly high. Based on past correlations, the index is now pointing to real GDP growth in the second quarter of about 5%, down from 6% a month ago. If Q2/10 GDP growth comes in anywhere near 5%, this market is going to be caught very short.


The same can be said for export orders. The June reading was a lot less strong than May, but May was one of the strongest levels recorded in decades; if things had continued at that pace the economy would have been on a moon shot. As it is, the June reading is unremarkable, and quite typical of what we see during recoveries. In fact, the June level of the index (56) is well above the average of the past 20 years (53.5), and is equal to the average of the index during the period June '03 through June '08, when real GDP growth averaged 2.7%.


Meanwhile, the employment index slipped only marginally, and remains at a level rarely exceeded at any time since the early 1970s.


Finally, the prices paid component of the ISM index registered a significant drop in June, but this is hardly bad news, and is most likely simply a reflection of the fact that energy prices have fallen of late (e.g., gasoline prices at the pump fell about 7% from mid-May through mid-June). In any case, a majority of those participating in the survey (57%) reported paying higher prices in June.

Overall, I would say the outlook for the manufacturing sector remains quite positive, and this strength is quite likely to "spill over" into strength for other sectors as well, thus bolstering the prospects for continued recovery.

2 comments:

Dr William J McKibbin said...

Scott, your export index chart is interesting and perhaps more important than any others you have recently posted. I concur that exports appear to be recovering. Moreover (and this is important), the fundamentals for expanded exporting are now excellent. The combination of a declining dollar and excess manufacturing capabilities is most hopeful for industry. Even more interesting though is that the service sector is uniquely positioned to experience competitive pricing advantages globally, which means we can sell services at a premium. Unfortunately, the small business service sector is poorly tracked by economists, so I am data poor in the my assessment. However, my private consulting practice (http://www.mckibbinusa.com) is experiencing a surge in overseas sales (which means I travel overseas a great deal these days). In the mean time, I am carefully tracking exports from the US for signs of improvement as I believe that exporting is the only way to grow the US economy substantially in the coming decade and beyond. Everyone should carefully watch exports for signs of improvement and especially as the dollar continues to decline in value. Thank you for the opportunity to comment...

Scott Grannis said...

Thanks for the anecdotal news. I think the prospects for continued export strength are very positive.