Thursday, March 1, 2018

Manufacturing sector ramping strongly

Earlier this year I noted that the manufacturing sector was off to a strong start. Today's ISM releases for February only underscore that point. Things look so good (if you ignore Trump's tariffs) that I'm compelled to post these impressive charts. They strongly suggest that with his tariffs, Trump could be about to snatch defeat from the jaws of victory.

Chart #1

There's been a decent correlation between the ISM manufacturing index and the health of the overall economy. February's number strongly suggests that Q1/18 growth is going to exceed current forecasts of 3-3.5% (according to the NY and Atlanta Fed's models, respectively).

Chart #2

Export orders are coming in very strong, which suggests that overseas economies are doing very well.

Chart #3

The relatively strong employment reading suggests that manufacturers are optimistic about their ability to expand.

Chart #4

This is a lovely picture of a US/Eurozone synchronized manufacturing recovery. The global economy is firing on all cylinders; why would anyone want to mess with this?


Benjamin Cole said...

Indeed, why would anyone "want to mess with this"?

Well, the Fed wants to raise rates. Even though we are below inflation targets.

While I somewhat agree that international trade tariffs would be a negative, a much larger structural impediment to US economic growth is found in domestic property zoning.

Grechster said...

I do not see the stuff of significantly higher inflation. Break evens, both five and tens, indicate 2% inflation for a long time. The latest PCE saw core rise just 1.5% yoy, far below the Fed's target. Gold is relatively behaved and not indicative of much higher inflation. Lending has cooled off somewhat. And the Fed's ace in the hole is its ability to raise the rate of IOER.

The Fed may WANT to raise rates and follow some silly preconceived plan. But I don't get the feeling that Powell or the whole committee are hellbent on following the blueprint. I believe they'll adjust depending on what comes down the pike.

Kind of like Yellen. She made a major mistake raising for the first time in Dec 2015. It was a ridiculous decision given the data. But, to their credit, they pretty quickly reversed course and added liquidity. The point: They weren't ideological to the point of being stupidly stubborn. And I think Powell is even more sensitive to the message of the market.

The real Fed Funds rate still says we're not too tight. This is good.

Maybe the 10-year yield ticks up some. I don't know. I just don't see the stuff of significantly higher inflation...

Benjamin, I totally agree with your comment on property zoning. But it'll never change, right? Kind of like the Fed itself. A fiat currency is an exercise in economic idiocy. But we must accept that it'll never change. The forces in favor of it are just too powerful.

WealthMony said...

Benjamin, as you know, I always look forward to reading your comments which I think are informed and constructive and do not detract from Scott's blog. However, I'm just not sure I agree with you regarding zoning. You've been going on about it for quite a long time. I don't think you'd want a pig farm right next door to you, would you? Without zoning, how could you prevent it? I'm open to hearing your arguments, which I've never read, but as of now, as much as I dislike big government with all its regulations, I'm for zoning (I think).

Benjamin Cole said...


I enjoy your comments too.

Well, as Matthew Grech points out (above) we will have property zoning regardless of my comments here on Calafia Beach. So in my small way, I am tilting at windmills.

A book could be written about property zoning.

Egads, what has zoning done to housing costs all along the West Coast? Businesses and people are literally getting suffocated out---like Amazon looking for another HQ somewhere else.

Sure, there will be the occasional bad situation if zoning was eliminated. But it is extremely unlikely that pig farms would end up near highest-and-best use areas. Those would be some expensive pigs! Even if someone did have a pig farm near a residential area, that does not give the right to the pig-owner to allow smells and noises to escape beyond some minimum.

There is no right to pollute the air other people breath, and that includes smells and noise.

Other situations could be handled by the free market, such as you buying first right of refusal on adjacent properties, if you feared they would be converted into pig farms or even high-rise condos, if that is what you did not want.

If you visit nations without zoning, or loose zoning, you see various free market adaptations. If you know from the get-go there is no zoning, you make different assumptions about your property and neighborhood before you buy. In Tokyo, property can be more easily developed, and now housing is cheap in Tokyo, despite it being a growing city (unlike other parts of Japan).

In some cities with loose zoning you see compound-style housing. The neighbors may be retailers, or there may be street vendors. So urban homeowners adapt by building walls around their property, and putting a house and garden inside.

On a larger scale, what we are talking about with zoning is a propertied and financial class colluding with compliant city officials to artificially boost property values, by limiting supply. That is not free markets!

Lenders love zoning, as they can extend loans to a safe business or property. Gee, if that works, then by all means let's license steel production and sales in the US, so that lenders will finance new steel factories. I assure you, it would result in financeable industry.

Why not have the City of Newport Beach zone, or license the number of workers that can work inside city limits? In this way, wages would not drop too low. Workers would scarce, and wages bid up. If it works for the propertied class, why not the working class?

Weill, I could go on. But I think in the larger sense we agree.

Government regulation is a bad idea.

John A said...

They have zoning in California and things are expensive.

They have zoning in Missouri and things are cheap.

Zoning makes no difference.

Benjamin Cole said...

John A--

I suspect rather strongly you are mistaken.

All others:

Maybe good news out there. Corporate profits look ready to set even more records.

John A said...

I hope you're not trying to tell me they don't have zoning in Missouri. Or Michigan. Zoning is EVERYWHERE. In spite of that, some places are cheap, and some places are expensive, even though they all have zoning. It has nothing to do with zoning, it has to do with how popular a place is.

WealthMony said...

470 of the members of the S&P 500 have reported earnings according to Zacks. Revenues are up 8.5% and earnings 14.5%. 77.2% have beat earnings estimates and that's the highest in 10 years.

Earnings are strong and the momentum is for even higher growth in the first quarter 2018. Earnings estimate revisions are on the move too.

Low interest rates, low inflation, accelerating growth are all positives for financial assets, and for the US economy.

I would welcome a manufacturing/industrial renaissance in the USA. This pre-announcement of tariffs worries me. We could hurt ourselves more than we think. Not good.