If you have been wondering whether a statistical recovery is at hand, today’s ISM manufacturing report should be the clincher.  The report was definitely bullish with the ISM index rising to 55.7 and sub-components supporting the understanding that the manufacturing sector is expanding. This is quite a contrast to last month’s weak data and demonstrates that last month was a one-month aberration in what should now be seen as a full-blown technical recovery.

I want to talk about this recovery briefly in the context of the signs that came before it, my own forecasting psychology and what the future holds.

The ISM data

The key data points to see as evidence of a fairly broad-based expansion in manufacturing come from new orders, production and inventories.  The production number came in at an incredibly bullish 63.3, marking the fifth consecutive month of increase. New orders slipped slightly, but were also in striking distance of the 60 range. (50 represents the demarcation between expansion and contraction).

But, from my perspective, it is inventories which are the most bullish data points. The inventories data show that inventories in the manufacturing sector were still being purged in October even while production is increasing.  That means that inventories are likely to make a huge contribution to GDP going forward in Q1 and Q2 of 2010. GDP could again surprise to the upside.

My mea culpa on forecast herding

All of this suggests the economy has been growing since the beginning of Summer. In the early Spring, I indicated that jobless claims were peaking (which added to my stock market bullishness at the time). This call turns out to have been accurate. However, at the time, this post produced very negative sentiments, albeit more from readers on Naked Capitalism than Credit Writedowns – in my opinion because most people erroneously extrapolate a current trend into the future (see my reaction to this from a post weeks later, “Through a glass darkly: the economy and confirmation bias in the econoblogosphere”)

Nevertheless, a piece from NBER guru Robert Gordon that I reported demonstrated to me that I was not alone in seeing the trend reversal in jobless claims. Eventually, in May I indicated that the jobless claims data were pointing to an imminent recovery and remarked that the data had usually been fairly accurate in the past.

And for the record, I have said I see a recovery happening probably in Q4 2009 or Q1 2010 (see my post “The Fake Recovery”).

The real question is how robust a recovery are we going to have and this is directly related to why the jobless claims series has been sending a false signal.  Now, initial claims has been sending a recovery signal since January. Yet, continuing claims continued to rise more quickly until last week.  In the past, one had seen these two series as harbingers of imminent recovery.  But, I am talking Q4 here.  Why? Deleveraging.

In the end, consumers are going to be forced to reduce debt and save more in this more cautious financial environment.  Team Obama does seem intent on re-kindling animal spirits but the personal savings rate has gone up nonetheless.  This will be a drag on GDP growth going forward and means that the economy’s rebound will be more tenuous and slower to develop.  In my view, this means recovery will be delayed and once it gets going it will be weak.  The potential for a double dip is very high.

So, to be clear, first derivatives are starting to turn up and since recession is a first derivative event, we are probably going to see an end to this recession soon enough.  But, with structural problems still remaining, the U.S. economy will be weak for a long time to come.

Why do I bring this up?  Because, despite the data pointing to recovery, I decided the start of the recovery process would be delayed until this quarter or Q1 2010 by consumers repairing their balance sheets – and, in retrospect, in part due to a desire to avoid being too far out of step with the consensus.

I must admit to falling prey to forecast herding, something I talked about in June (admittedly without mentioning my own culpability which I should have done). At the time, I said:

No one wants to go out on a limb with a bold call only to see this prediction proved wrong.  If one fails, it is better to fail conventionally.  The necessary corollary of that statement is this: market forecasters and analysts play it safe by making sure their forecasts are not often far from the consensus forecast.  Think of the consensus forecast as an anchor which restricts the outlook of any individual forecaster afraid of failing unconventionally.

In Roubini’s case – and this logic also applies to media darlings like Meredith Whitney – it does NOT pay to up the ante.  What Faber is saying is that they have already benefitted from the bold and unconventional contrarian market call they initially made.  There is little payoff and much risk from continuing on that path.  A bearish analyst who misses the turn gets the stick.  Just ask the original Dr. Doom, Henry Kaufman.

Roubini is not running with the herd

The one thing that makes me think about my error in tweaking my bullishness has to do with Nouriel Roubini. In the quote above, I said he has little incentive to double down on a bearish forecast at this point in time.  Both he and Meredith Whitney, two voices of caution leading into crisis, have been much more upbeat of late. Are they hedging as I did?  Hard to say.

But, with Nouriel Roubini’s recent FT Op-Ed, this is over. Roubini decried the easy money policy he believes is leading to a dollar carry trade and an increase of risk appetite across a wide variety of asset classes. He believes this experiment will not end well. I share his view.

Roubini, in going public in this way, is officially departing from a more hedged nuanced position he has been using over the last few months as the recovery has taken hold. Yves Smith says:

Nouriel Roubini has officially left the “hedging your bets on the economy” camp.

I applaud him for coming out with this piece and suggest you read it because it may come to be seen as the make or break call in determining his reputation as economic soothsayer.

Recovery is happening, but watch asset prices

For my part, I will look to avoid a repeat of the ‘jobless claims incident.’ Hopefully, I have done by writing my depression post at the beginning of last month, which outlines my view that we are in a cyclical recovery in the middle of a longer-term depression.

I would like to make some amendments to my thinking at the time though. First and foremost, I have come to doubt whether we are seeing a balance sheet recession right now. One reason I am writing this post is because the ISM manufacturing data turned up in May at precisely the same time that the credit revulsion-induced savings rate turned down. Translation: there is no balance sheet recession in the U.S., at least not yet. (see my post “Americans are not increasing savings”). This means the recovery could surprise to the upside. Moreover, the ISM data point to potential upside surprises from inventories, leading to an even more robust outlook.

What I believe is happening has much to do with Nouriel Roubini’s comments. U.S. economic policy is geared toward reproducing the status quo ante via reflation of asset prices (something Bill Gross thinks is the right policy and even Dilbert has made fun of). The policy has been wildly successful so far, with asset prices bubbling over globally. I have called this the fake recovery, but as recently as September I was on the fence about how much uptick we were to get. I never dreamed the recovery process could be so robust given the headwinds we faced.

However, reflation has also given investors a license to take risk. Look at the return of John Meriwether as a telltale sign.  Reflation policies are inflating assets far and wide: European high yield, American high yield, Swedish house prices, London house prices, Chinese property prices, and inducing reckless lending. The list is endless. Even Bill Gross’ piece pointed to inflated prices, a view shared by Jeremy Grantham.

The long and short is we are seeing another asset bubble inflating courtesy of easy money. While Morgan Stanley worries easy money will lead to inflation, former Morgan Stanley economist Andy Xie fears this will end in a double dip. To make matters worse, there is a dollar carry trade now spreading a liquidity seeking return dynamic abroad. This is the additional risk of which Roubini writes, believing it could precipitate another crunch or crash. Ironically, a strong recovery is not necessarily bullish.

Is a double dip or crash a baseline scenario? No, not necessarily – but it is increasingly likely. So, as bullish as I believe the data are, I am more worried about a bad outcome, not less.

Related posts:

• ISM shows manufacturing sector close to recovery
• Both initial claims and continuing claims now pointing to recovery
• Jobless claims may signal the end is near
• ISM: September manufacturing data disappoint; market sells off
• Morgan Stanley: Recession will ‘end by mid-to-late summer’

This morning, I ran across a post by Prieur du Plessis, which linked out to a Stephen Roach interview on Charlie Rose.

Roach is the head of Morgan Stanley Asia and has been a voice to listen to when trying to discern where China is headed and how its relationship with the United States will develop. That was the topic of conversation between Roach and Rose. Through the links on that post I happened upon a 1996 Roach interview on Charlie Rose of a very different sort where he talked about the hollowing out of America and his concern for the future. I want to link those two below.

In the transcript of the recent China interview on Rose’s website, Roach marvels about the progress made in China:

CHARLIE ROSE: You left Wall Street to go live in China.

STEPHEN ROACH: I did. About three years ago, your friend and mine, John Mack, called me up and said, 25 years as an economist, a long time, good job. How would you like to do something different and be the chairman of Morgan Stanley’s business activities in Asia? And I told John I thought he was nuts. I had the best job. I wasn’t going to leave it. He said, "Think about it."

And, you know, John, when he says, "Think about it," there’s a fair amount of emphasis there. I did think about it. And I’d built fabulous relationships in Asia over the years, Charlie. I was passionate about the region. I thought I knew it well, but I knew in my gut that it would be a lot different from the inside than from the outside, and I said, yeah, I’m going to go for it.

And I’ve been out there now about two and a half years. And I have no regrets. I love it. I have learned an awful lot about Asia, and I thought it was time to put it down in a book and get it out there when the world is very focused on Asia, its own challenges and its role in the global economy.

CHARLIE ROSE: What do you love and what have you learned?

STEPHEN ROACH: What I am most passionate about in terms of Asia is what they’ve done, especially in China, over the last 30 years. You know, big celebration, 60th anniversary of the People’s Republic of China. But the first 30 years were pretty awful and the next 30 years have been spectacular. And the difference is they have really put huge focus on transitioning this economy from one that was owned by the state to one that is more of a market-based economy. They’ve taken huge risks in terms of reforms, layoffs, building market structures, building companies that we’ve never seen before. And to be on the inside and watching, watching that risk taking up close is a pretty fascinating experience for anyone. And I love every bit of it.

They go on to talk about the outlook there as well as how the government is dragging its heels on increasing domestic demand and shoring up a porous social safety net among other things. I definitely suggest you read the full transcript here. It makes for a better understanding of China. A snippet of the video is embedded below.

However, what was equally interesting to me was that Roach and Robert Reich were talking to Rose about concerns over the hollowing out of America’s workforce through downsizing (off-shoring had not yet gathered full steam).

Roach says:

“What has changed for me is my appreciation for what it has taken to get from point A to point B over the last ten years. It would be one thing if these productivity gains were built on the back of a more talented, skilled, educated, dynamic work force, but it’s another thing altogether if these productivity or efficiency changes were built on the basis of strategies that are hollowing out our companies, hollowing out our workforces, stagnating real wages – tactics in the end that can really lead to industrial extinction.

I’m sure you see the connection. If not, watch the video below in the context of the more recent video and your knowledge of what is happening in the global economy. I will say this: Roach was right about the dichotomy between the benefits to the owners of capital and the benefits to labor that these corporate strategies created.

Where I think his view could be tweaked looking back 13 years is in terms of what it has meant for Corporate America.  The hollowing out of America’s workforce and lack of investment domestically has not meant a hollowing out of Corporate America. Those companies that did downsize American workers in a ‘short-term’ play for next quarter’s earnings are many of the ones which have outperformed for the last 13 years because they have gone global. And the impressive leaps forward in China are testament to the gains made in places like China due in part to that move. It’s called ‘global labor arbitrage’ and it is what I see as the defining element of globalization as practiced.

In the end, however, a day of reckoning will come – not for the managers of the companies who have profited over the time span between these two interviews because they are going to keep their bonuses.  The day of reckoning for America will come in terms of the growth and dynamism of its middle class. Whether the U.S. then moves toward a Latin American style economic structure of a few rich at the top, a weaker middle class, and everyone else at the bottom or back to a more equal income and wealth distribution depends on the reaction by the ‘body politic,’ not on Wall Street.

Related posts:

• Stephen Roach: Downturn in Asia less severe, but recovery later
• Stephen Roach and Jim Grant: Video of credit crisis thoughts
• Stephen Roach is still bearish, no recovery until 2010
• Stephen Roach sees a W-shaped recovery for China
• Stephen Roach is talking double dip again

Earlier today we learned that the Singapore PMI was much weaker than expected for September 2009, coming in at 50.6 versus 54.4 for August. While this demonstrates that the manufacturing sector there is still rising, it is doing so just barely.  This was the lowest reading since April and should be seen as a clear indication that export-led growth in Asia is stalling.

When I searched the Internet for further word on this development and what other analysts were saying, I came up empty-handed. I am relatively bullish about the prospects of a multi-year recovery given my negative longer-term outlook.  A double-sip recession is not my baseline view, but it is certainly a strong possibility. We should watch the data flow from Asia as a canary in the coal mine suggesting a less robust near-term outlook.

Related posts:

• Rosenberg: ’Asia Revival May Be For Real’
• Consumer confidence sinking
• Stephen Roach is still bearish, no recovery until 2010
• Will Goldman’s Jim O’Neill change his bullish outlook?
• Industrial production implodes

The September 2009 Manufacturing ISM Report On Business showed the manufacturing sector and economy expanding.  But no matter, the markets wanted more. Equities sold off in a major way today. We’re talking over 200 points on the Dow and 65 points on the Nasdaq. On the other hand, Treasuries rallied and the yield on the 10-year is now down to 3.19%. As I told you selling equities and buying treasuries was a good idea two weeks ago, I think this move has further to run.

Looking at the actual data, things were not terribly bad. The index fell modestly from 52.9 to 52.6. But it was the trend which was dubious. Notice the highlights in red.

The PMI is down. And the major components, new orders, production and employment, are all going the wrong way. Not good.

What does this tell us?  Not a whole lot, really. I did note that the inventory purge is proceeding less slowly, which will help GDP but still has me wondering if there’s more to the resurgence in manufacturing than inventories. But, it’s just one month’s data. In isolation, it’s meaningless.  However, if we see the same pattern next month, you should be asking yourself where this recovery is headed.

Source

Manufacturing ISM Report On Business – ISM website

Related posts:

• ISM shows manufacturing sector close to recovery
• US manufacturing suffers a steep decline
• ISM: U.S. Manufacturing sector growing again
• ISM: Is this the mother of all inventory corrections?
• ISM Manufacturing Index: New orders growing

The August 2009 Manufacturing ISM Report On Business was released and the widely followed PMI Index came in ahead of expectations at 52.9. Expectations were for 50.5. As 50 marks the divide between contraction and expansion, this survey indicates that U.S. manufacturing is expanding for the first time in years.

This is the strongest reading since June 2007 and the first reading above 50 in 19 months. The report was strong across the board. But, employment continues to lag and it came in at a disappointing 46.4. The increase in production has much to do with the inventory cycle, something I have been anticipating since April (see my section on other positive economic factors in this post).  So, the question now is whether this uptick is sustainable.

For now, the recovery in manufacturing seems to have arrived. Below is the chart supplied by the ISM outlining the manufacturing situation.

Both the new orders and the production numbers were off the charts strong, meaning that the third quarter is almost certainly going to show a positive contribution from manufacturing.  Prices paid (due to the rise in commodity prices) are a negative factor, as is employment. The report indicates that inventories are still being wound down, albeit it at a slower pace.  This sets Q4 up for some very favorable comparisons.

On the whole, this is a very bullish report and should provide some support equity markets, which have been faltering of late (Addendum: the Dow Jones Industrial Average was off 100 points just two hours into trading despite this report).

Update 1200ET: The Dow is now off 155 points.  This tells you the equity markets are running out of momentum, one reason I have turned bearish.  I would have thought a bullish report would at least stem losses. Wrong!

Source

Manufacturing ISM Report On Business – ISM website

Related posts:

• ISM shows manufacturing sector close to recovery
• Philly Fed survey points to manufacturing rebound
• ISM: September manufacturing data disappoint; market sells off
• US manufacturing suffers a steep decline
• ISM Manufacturing Index: New orders growing

The Chinese are getting serious about addressing overcapacity that has developed in industry, according to statements released by the state press. This should be seen as a positive development given concerns about a bubble in property and shares and stories of malinvestment related to China’s attempts to reach lofty growth targets.

 China’s State Council said yesterday that in emerging sectors like wind power,  "overcapacity and redundant projects remain prominent because of slow progress in industrial restructuring in some of these sectors."  As a result, regulators were cracking down both on lending to the sector and in direct oversight.

The Financial Times believes the Chinese will have a tougher time reigning in the heavy industrial sectors like steel and cement, which state-owned enterprises dominate. They cite steel production of 470 million tons compared to a capacity of 600 million as an example of the large overcapacity in these sectors.  Cement is even worse, with only 70 percent of capacity utilized.

But, here too, the Chinese are trying to eliminate overcapacity. Two weeks ago they announced a three-year freeze on approval of all new expansion projects in the iron and steel industries. So, while the stimulus campaign in China has allowed the country to hit growth targets, the government are preparing for a more sustainable industrial mix in the future.

The question everyone is asking is whether China can make the leap from an export-led economy dependent on demand in Europe and the United States. I see these moves as an indication the Chinese are at a minimum attempting to make that transition, while still maintaining high levels of economic growth. This will be a multi-year process and it is still early days.

Related posts:

• Tariffs: Other industries may line up for sanctions against China
• Stephen Roach sees a W-shaped recovery for China
• China is set up for a big fall
• Should we expect a protectionist China?
• The bullish argument for China

Toyota, now the world’s largest automaker, has said it would halt production at a plant in Aichi prefecture in Japan, reducing total output by a massive 220,000 cars.  This should be seen as a recognition of the over-capacity tat exists in the auto sector despite other recent upbeat news.

Toyota raised its parent-only production target for 2009 by 150,000 units to 5.95 million on Aug. 20 in response to various government stimulus programs and a reduction in inventory. The last press release from Aug. 21 on Toyota’s US website touts Toyota’s addition of capacity at its site in Huntsville to produce an additional 216,000 vehicles, with production scheduled for 2011.  From these two announcements, one would assume that production is slated to ramp up.

Yet, we now understand that the company is looking to actually reduce overall capacity in order to return to profitability.  In fact, some experts believe Toyota’s capacity cuts could eventually reduce capacity by 700,000 cars or 7% of annual production.  Reuters is talking about a cut of 1 million units of capacity or 10% of annual production.

The problem is that Toyota, which produced 8.2 million vehicles in 2008, has a capacity of about 10 million units worldwide.  And when your 2009 target is for 5.95 million vehicles that necessarily means you have a huge amount of excess capacity.

To my mind, these announcements speak to the vast difference between the meaningful uptick in demand today, the much larger demand of just a few years ago, and the capacity built for even more demand that was expected. 

Yes, the economy is picking up globally, but while 5.95 million units is more than 5.8 million, it is nowhere close to 10 million.

Related posts:

• Third quarter auto production to be significant boost to U.S. GDP
• Industrial production implodes
• Auto sales plunge in September
• Sweden: competitive auto bailouts begin with Saab and Volvo
• Chart of the day: Industrial Production

The Federal Reserve Bank of Philadelphia released its monthly Business Outlook Survey for August 2009. The numbers showed that the manufacturing sector in the region is in recovery mode right now, with the survey recording its highest level since November 2007, the last month before the recession began.

The region’s manufacturing sector is showing some signs of stabilizing, according to firms polled for this month’s Business Outlook Survey. Indexes for general activity, new orders, and shipments all registered slightly positive readings this month. Although firms reported continued declines in employment and work hours this month, losses were not as widespread. Most of the survey’s broad indicators of future activity continued to suggest that the region’s manufacturing executives expect business activity to increase over the next six months.

Current Indicators Suggest Improvement

The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, increased from -7.5 in July to 4.2 this month. This is the highest reading of the index since November 2007 (see Chart). The percentage of firms reporting increases in activity (27 percent) was slightly higher than the percentage reporting decreases (23 percent). Other broad indicators also suggested improvement. The current new orders index edged six points higher, from -2.2 to 4.2, also its highest reading since November 2007. The current shipments index increased 10 points, to a slightly positive reading.

Labor market conditions remain weak. Firms continue to report declines in employment and work hours, but overall job losses were not as large this month. The current employment index increased from a weak reading of -25.3 to -12.9, its highest level in 11 months. Twenty-three percent of firms reported declines in employment this month, down from 30 percent in the previous month. Although the workweek index remained negative, the index increased nine points, to -6.3.

The weak link again is employment.  As I mentioned earlier in the week, I expect manufacturing to lead out of recovery with employment a weak link in the recovery story. And this survey is yet another indication of this dichotomy.

Related posts:

• Philly Fed: Business outlook shows ‘notable improvement’
• Will Goldman’s Jim O’Neill change his bullish outlook?
• U.S. ISM manufacturing survey hits 28-year low
• 467,000 jobs lost in the U.S. in June 2009
• US manufacturing suffers a steep decline

Right now many economists believe the US economy is poised for recovery.  Even I believe the economy will recover by year’s end. But for the man in the street, things hardly look like a recovery right now. Harried by falling house prices, foreclosure and lost employment, the US consumer is over-indebted and has run out of gas. Ordinary Americans are probably more concerned about building a savings cushion and reducing credit card debt than buying the latest SUV or flat screen TV. Naturally, one should then ask, “what is this recovery that economists and market pundits keep talking about and when’s it going to happen?”

Mark Thoma does a good job of explaining it in his recent post “How Will We Know when the Economy Turns the Corner?” He points out three areas that need to recover: the banking system, business investment, and personal consumption. His conclusion: when these three areas can show sustainable growth without the helpful aid of government stimulus, we will be in a real recovery.

Therein lies the problem. The banking system is systemically weak because it is being propped up artificially by government. Commercial property is to 2009 what residential property was to 2007 and 2008. And the US consumer will be in balance sheet repair mode for years. Clearly, a real recovery is not coming anytime soon.

But a recovery is still likely to come. It will be a fake recovery, a technical recovery, a statistical recovery, a partial recovery, not a real recovery.  And this has major implications for the economy and for your investments. Let me explain.

The fake recovery

Back in April, I wrote about the apparent desire of the Obama Administration to recapitalize the fragile US financial system by relying on a cyclical rebound and government largesse to increase bank profitability before another crisis came ashore. Team Obama seems to believe we have had a liquidity crisis in the financial sector, not a solvency crisis.  In this view, aggressive policy action and time would heal most wounds.

And, indeed, here we are in August with the US economy looking much more robust. This quarter might even see positive growth in the economy.  But, it is not a liquidity crisis we have been witnessing in the US; it is a solvency crisis.  US financial institutions still have hundreds of billions of toxic assets on their balance sheets which have not been written down. Any recovery we experience would be a fake one, papering over weak balance sheets and overcapacity in the financial services sector. At the first sign of economic weakness, these problems would magically re-appear, doing untold additional damage to the economy.

The technical or statistical recovery

And signs of economic weakness are already on the horizon.  The recent employment and consumption data have been poor – below expectations, causing equity markets to sell off globally. As I mentioned at the outset, ordinary Americans  are still in a world of hurt.  The economy is at a much lower ebb today than it was in, say, November 2007, the last month before recession took hold. Recovery will begin as a technical recovery only. For most people, the rest of 2009 and even 2010 will not feel like a recovery because people will still be losing jobs and homes and we will still be operating below that November 2007 level. The recovery becomes real to most people only when we reach and surpass the previous level of economic output we had before the downturn began.

The partial recovery

Likely, we will start a technical recovery in manufacturing as today’s Empire State index report suggests. This will move into the services sector later. That’s the output-oriented view. Looking at this from who’s doing the consuming, government spending is already expanding aggressively.  Business Investment will probably be soon.  Last will be personal consumption. So, there could be a long lag between between when output and production turn up and when income, employment, and retail sales do.

Van Hoisington and Lacy Hunt have coined the term partial recovery to describe this disparity. Their analysis reveals that from 1967 until 1999, there was a fairly uniform recovery in all five of those economic factors in all business cycles.  However, in the 2000-2001 recessionary period, employment and income lagged substantially.  The US only had a partial recovery for a year-and-a –half. This is very bad for stocks.

The S&P 500 bottomed before the economy in those other business cycles.  However, at the beginning of this decade, because of the partial recovery, the S&P 500 bottomed 15 months after the recession had ended.

Translation: stock prices anticipate a complete, not a partial recovery. If employment and retail sales data continue to disappoint, shares will turn down and test new lows.

Major themes

1. Look to the industrial sector as a leading indicator of recovery. Since manufacturing is clearly leading out of recession, one should expect this sector to be the canary in the coalmine telling us how robust the upturn is likely to be.
2. Expect the banking sector to continue to benefit from government largesse.  The only way we get recovery is if the financial sector recapitalizes by making a lot of money now when firms can borrow cheap funds due to low interest rates.  No bank recovery equals no recovery.
3. Sell retail stocks.  Retail was at the forefront of the rally in 2009. These stocks have had an enormous run-up with bank stocks. Their stock prices reflect expectations of a V-shaped recovery that is not going to happen.  But, unlike banks, they don’t have government policy padding their bottom lines.  Consumption growth is likely to be weak. The only way that individual retailers can earn more money is by stealing share or cutting costs.
4. Watch for signs of a partial recovery as a market sell signal. If we see the ISM Manufacturing Index is hitting 50, but retail sales remains disappointing and the employment market is still weak, you know we are going to have a partial recovery.  That’s a big market (SPX) sell signal.

I expect the macro data to be the key to market direction in September and October. So, point 4 is the most important one.  Data that reflects a unified recovery would be bullish even if it disappoints.  Weak retail and employment data, on the other hand, means this rally is about to hit a brick wall.

Related posts:

• Partial recovery will mean new lows for stocks
• Unemployment numbers still point to partial recovery
• Looking beyond the fake recovery
• Philly Fed survey points to manufacturing rebound
• Wood warns of correction, says “key variable in the West is government policy”

Today the July 2009 Manufacturing ISM Report On Business was released and the widely followed PMI Index came in ahead of expectations at 48.9.  Any number below 50 represents contraction, so this figure shows that the manufacturing sector in the US contracted for an 18th consecutive month.  Nevertheless, the improvement since the beginning of the year is marked and given the trend, the sector will likely be above 50 next month or soon thereafter.

Last month I mentioned that new orders were no longer increasing as the reading had slipped below 50.  That was very worrying to me and it makes new orders a number to watch going forward.  There was a brisk uptick in new orders in July that, if sustained, will mean that increased production is not just a result of restocking of inventory but of actual order flow for product.

Now, if you read Calculated Risk’s take on this report, you would get the impression that things are still looking pretty bad in the manufacturing sector.  I have immense respect for the work done at CR , but that type of post reflects a clear bearish bias.  I have a bearish bias toward the US economy as well, otherwise my blog wouldn’t be named Credit Writedowns.  However, I see the facts as they are presented – and this report was very bullish.

Not only did new orders tick up, but a number of other data points show expansion: production, supplier deliveries and order backlogs, in particular.  You should also note that the ISM data suggests the overall economy is growing for a third month in a row.

Given this data and other recent bullish economic reports, don’t be surprised if Q3 GDP change prints a positive number.  If it does, it is very likely that the recession is all but over right now.  Mind you, I still am talking about a weak Q4 or Q1 2010 recovery and possible double dip.  But, I am aware that it is mostly upside economic risk that is apparent in the US. The data cannot be ignored.  And right now, it is very bullish.

Manufacturing ISM Report On Business – ISM website

Related posts:

• ISM: U.S. Manufacturing sector growing again
• ISM Manufacturing Index has hit bottom
• Services sector still contracting, but shows more new orders
• US manufacturing suffers a steep decline
• Services ISM survey falls indicating no recovery

The June 2009 Manufacturing ISM Report On Business® came out today and we saw yet another rise in the PMI to 44.8.  While equity markets in the U.S. seemed pretty pleased that the numbers continue to go up, I found this report a bit troubling.  Let me tell you why.

Back on January 2nd, we saw the ISM at a 28-year low of 32.4.  With 50 as the break even between contraction and expansion, 32.4 was showing a deep, deep recession for the manufacturing sector.  Since then, things have picked up considerably. In fact the ISM data indicates that the overall economy is growing for the second month in a row – and at a faster rate.

But what bothers me is the uneven picture painted by the areas highlighted in red.  They point to an increase in production which is no longer predicated on growth in new orders.  In short, we may be seeing a huge inventory restocking huge slowdown in the inventory purge – and that’s it.  Notice how new orders are now contracting.  Yet, inventories are considered too low.  That has caused the manufacturing sector to crank up production to the point where production is now growing.

Translation: manufacturing and production are now adding to GDP instead of subtracting from it. This is something I certainly anticipated (see my post “Third quarter auto production to be significant boost to U.S. GDP”).  However, it looks more like this increase in production is merely a response to the low level of inventories.  Until we see new orders firmly above 50 on this survey, you should be sceptical as to the sustainability of any increases in production.

According to the ISM, the following is reflective of what survey respondents are saying:

• “Customer inventory burn is complete and real demand has reappeared.” (Machinery)
• “… a lot of people are requoting old business and using favorable pricing to negotiate with their current suppliers.” (Computer & Electronic Products)
• “Banks are reluctant to lend to businesses, and until this changes the economy will continue to be weak.” (Fabricated Metal Products)
• “Slow June, but firm large orders in July, August and September.” (Food, Beverage & Tobacco Products)
• “Market appears to have bottomed out as aftermarket has picked up slightly over the past month.” (Transportation Equipment)

Based on this, one would surmise that production is ready to ramp up to meet new demand. All that is needed is more available credit.  However, we will need to see new orders confirm this in the third quarter or this will wind up as the mother of inventory corrections and nothing more.

Source

ISM Manufacturing Survey – Institute for Supply Management

Related posts:

• The mother of all inventory corrections is not the same as re-stocking
• ISM shows manufacturing sector close to recovery
• ISM Manufacturing Index has hit bottom
• US manufacturing suffers a steep decline
• ISM: September manufacturing data disappoint; market sells off

Apparently, the U.S. auto industry is working off a significant backlog of inventory because I have been hearing that pretty much everyone in North America is planning to ramp up production for the third quarter.  This is prima facie evidence of the huge inventory-based production changes which I have said will make Q3 and Q4 look much better than Q1 and Q2.  In April, in my post “The Fake Recovery,” I said:

Obviously, this means that U.S. Q1 and perhaps even Q2 GDP will be very low due to the subtraction of inventories now being purged. However, when we get to Q3 and Q4, this effect will be gone and quarterly and yearly comparisons will look favourable. So the inventory purge may mean a huge upside surprise to GDP in the second half of the year and early 2010 – potentially enough to see positive GDP numbers.

The automakers are doing their part to make this story come true.

1. Chrysler (via Bloomberg):
   

   Chrysler Group LLC, the U.S. automaker created out of bankruptcy last week, said it will resume production at seven vehicle plants the week of June 29.

   The facilities are in Michigan, Ohio, Missouri, Ontario and Mexico, the company said today in a statement. Chrysler reopened a Detroit car factory on June 15. Other assembly plants may not open until late July after they are reconfigured to build 2010 models, spokeswoman Dianna Gutierrez said in an interview…

   Based on the current sales level and limited production, Chrysler’s inventory may be well under 200,000 at the end of July, said Haig Stoddard, an automotive analyst at IHS Global Insight’s Troy, Michigan, office.

2. Ford (via USA Today):
   

   Ford is boosting its third-quarter production schedule after seeing more demand for its cars and trucks in June, the company said Monday.

   Ford (F) plans to increase production by 16% compared with the third quarter of 2008. The automaker had said it would increase production 10%, but is adding another 25,000 vehicles because it’s seen some stabilization in June auto sales, to be reported Wednesday.

   The news comes amid several preliminary reports that June sales have been stronger than recent months. Last week, Edmunds.com and J.D. Power reported that June sales had increased significantly compared with May sales.

3. GM (via WSJ)
   

   …The deep discounts that General Motors Corp. and Chrysler Group LLC have offered to boost sales are also likely to bolster June sales.

   Those factors suggest "the worst is behind us," Mr. Pipas said. "Even if sales fail to hit the 10 million milestone, we’re still not slipping back." A GM spokesman also said an annualized 10 million sales rate is possible for June.

Expect Q3 to be significantly better than Q2.  Moreover, we should also expect Q2 to be well above the -5.5% annualized GDP change we saw for Q1 in the U.S.

Related posts:

• Strong May auto sales are bullish for retail sales
• Auto sales plunge in September
• The mother of all inventory corrections is not the same as re-stocking
• ISM: Is this the mother of all inventory corrections?
• Does positive growth in Q2 or Q3 mean the recession is over?

During the Great Depression, it was the Smoot-Hawley Tariff Act, which in hindsight is blamed for triggering a wave of protectionist actions globally.  Protectionism was a major contributor to the downward spiral that created depression.  So, have we avoided this kind of outcome this go around?

At this juncture, it is pretty unclear we have. Simmering disputes with China in particular are creating anger in Beijing.  First, there was the U.S. steel industry complaint over the dumping of cheap Chinese tires in the U.S.  This dispute has received little press.  However, the International Trade Commission(ITC) has just sided with U.S. steel interests. I reckon the issue will now become more important.

Then, there was the link between Rio Tinto, the Australian commodities producer and Chinalco, the Chinese commodities company. Rio got itself in a bit of a mess when it leveraged up only to see commodity prices tumble. As a result, the company was forced into the arms of Chinalco.  But, Australians and Rio shareholders did not like the concept of the Chinese having such a huge stake.  So, BHP Billiton came to the rescue and Chinalco was stuffed (and received a hefty breakup fee).

These types of things are really getting the Chinese sour.  And the China of 2009 is akin to the United States of 1930 as Alpha Creditor to the world economy. So, when just days ago Beijing started a ‘Buy China’ policy, we should realize that a Smoot-Hawley outcome is still something we need to act vigorously to avoid.  It is protectionism in China as retaliation that we must worry about.

Now that the U.S. has received a green light from the ITC to restrict Chinese tire imports, it will be instructive to see what the Obama Administration does.

Related posts:

• China detains Rio executive on suspicion of espionage
• China launches retaliatory investigation into U.S auto subsidies
• China: we “will take steps to protect the interests of our domestic industries”
• Tariffs: Other industries may line up for sanctions against China
• Jagdish Bhagwati: Obama is a protectionist

The Federal Reserve Bank of Philadelphia is out with a widely followed Business Outlook Survey for June.  The numbers are very good.

Declines in the region’s manufacturing sector were much less in evidence in June, according to results for this month’s Business Outlook Survey. Indexes for general activity, new orders, and shipments showed notable improvement, suggesting recent declines have lessened dramatically. Indicative of ongoing weakness, however, firms reported sustained declines in employment and work hours this month. Most of the survey’s broad indicators of future activity showed continued improvement, suggesting that the region’s manufacturing executives are becoming more optimistic that a recovery in business will occur over the next six months.

Current Indicators Reflect Near Steady Levels of Activity

The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, increased from -22.6 in May to -2.2 this month, its highest reading since September 2008 when the index was positive for one month (the index has been negative for 18 of the past 19 months, a span that corresponds to the current recession; see Chart).

Source
June 2009 Business Outlook Survey – Philadelphia Fed website

Related posts:

• Philly Fed survey points to manufacturing rebound
• Will Goldman’s Jim O’Neill change his bullish outlook?
• ISM: U.S. manufacturing contracting slower
• ISM Manufacturing Index has hit bottom
• U.S. ISM manufacturing survey hits 28-year low

Last month I said that June was significant for two reasons.  First, we are going to get our first test of data that could disappoint, which would spell trouble for an overbought market. But, just as important, we need to watch the industrials because there is going to be no sustainable recovery unless these cyclical companies are leading the way.  If the recent awful earnings report from FedEx is any indication, this sector is still in a world of hurt.  The Globe & Mail has a good take on how this is shaping up.

FedEx’s forecast yesterday was certainly no green stalk. During the rally that began in March, its shares surged 80 per cent by early May as investors bet that a full financial meltdown and economic depression were not in the works. That’s about double the move of the broad S&P 500 over the same period, and it reinforced the belief that freight haulers are barometers for the global economy.

"They are a reflection of consumer conditions," said Morgan McGowan, assistant economist at Moody’s Economy.com. "The companies involved operate with a combination of air and ground, and even rail shipping as well. So they give a broad range of the different types of shipments that are going out.”

Now, though, the barometric reading has changed as investors lose patience over the lack of hard evidence of an economic recovery. FedEx shares have fallen 17.8 per cent over the past month – worse than the broader market – and have sent some strategists to the Dow Theory, a technical indicator that gets some respect from those who sneer at technical analysis.

According to the theory, an upward move by the 30-member Dow Jones industrial average means nothing unless the 20-member DJ transportation average also moves up. The reason? The industrials make the stuff that the transportation companies haul. If there’s no hauling, then there probably isn’t a lot of demand for the stuff being made.

Lo and behold, the transportation average – which includes Burlington Northern Santa Fe Corp., Union Pacific Corp. and FedEx – has hit hard times, tumbling 6.6 per cent since last Thursday.

The industrials are now playing catch-up: The index began its descent on Monday and has since fallen 3.4 per cent – and the Dow Theory hints at more trouble ahead unless the economic news starts pointing toward sunnier days.

"Until now, ‘less bad than expected’ has been enough for investors," John Hussman of Hussman Funds, said in his weekly letter to clients. "At this point, however, stocks are priced to require an economic recovery."

In short, this market has risen to seriously overbought levels that has priced in imminent recovery.  But, the FedEx news should give you pause in regards to an imminent recovery. Even a delay in recovery until the fourth or first quarter would be a huge disappointment in this market.  Continued recession beyond that time would be catastrophic.

Related posts:

• Alcoa earnings on deck, but focus on FedEx and UPS
• Unemployment numbers still point to partial recovery
• James Montier sees “deep value” in markets – he is bullish
• Irish banks have unreported bad debt
• The House defeats the bailout plan and shares plunge

As you can probably tell from previous posts, I like he Currency Strategy Team at Brown Brothers Harriman.  I do not always agree with them – I am generally dollar bearish, whereas they are not – but I do like their analysis.  Marc Chandler and his team are out with a fairly bullish note on the auto sector and how May auto sales point to upside surprises for retail sales and the U.S. economy.  I tend to take a more sceptical view about retail sales (balance sheet recession?), but their point of caution on the employment impact of auto layoffs to seven states is duly noted.  I do not discount their views one bit.  Here is what Chandler has to say (I have added bold to the bits I find most interesting):

May auto sales were stronger than expected at a 9.9 million annual unit pace.  In the same week GM filed for bankruptcy, domestic auto sales rose to 7.4 million, the highest since December (Q1 average was 6.8 million). There are several, even if underappreciated, implications.  First, the inventory overhang in this sector appears to be easing and production looks to be below the level of sales, so this may help underpin manufacturing in the months ahead. Second, the increase in auto sales likely points to a stronger than currently anticipated retail sales report, which is expected June 11^th.  The early consensus is for a 0.2% increase on the headline and ex-auto components.  Look for economists to revise up their forecasts after tomorrow’s chain store sales.  Gasoline prices rose a little more than 20 cents in the month.

Two other factors may also support retail sales.  First, the weather generally improved, which often helps retail sales.  This is after the March-April distortions from Easter.  Second, last month the bulk of the one-off $250 payments to Social Security recipients were sent out.  This is of course on top of the more than 5% increase since January in cost-of-living, tax refunds, and a reduction in the payroll withholdings.

The bankruptcy and shrinkage of Chrysler and GM will have implications not only on their employees.  Remember there are more than three-quarters of a million workers in the auto parts industry.  A rough rule of thumb is that every auto job supports roughly 4.5 jobs, not just parts jobs, but other jobs that service auto workers and their families.  Seven states in particular will bear the burden. For them the auto manufacturing industry hired more workers than any other private sector.  These states are Michigan, Indiana, Kentucky, Missouri, Ohio, South Carolina and Tennessee.

At the same time, however, do not over exaggerate the significance.  There are some pundits who see the demise of GM (and Chrysler) as a sign the US is no longer the dominant auto manufacturer and yet another symptom of the decline of the US (and the role of the dollar).   While such sentiment appears prevalent, it seems more than a little exaggerated.

The US dominance in autos has long ceased and the bankruptcy of GM and Chrysler is not the cause of that loss of dominance, but rather its reflection.  While there will be social and economic consequences, autos have become nearly a commodity with Chinese and Indian producers able to make a car for under $5,000.   The US market is mature.  There is nearly a car for every licensed driver in the US.  Thus far this year, China has sold more cars than the US has.  This is also true in several other industries, where the market is mature and penetration rates are high.

But this should not be confused with a de-industrialization of the United States.  Before the recession, so far on par with the 1980s contraction, the US industrial output was $2.8 trillion.  This is more than the combined dollar value of Japanese and Chinese industrial output.   The value-added of automakers and suppliers is about 5.5% of GDP.  By comparison, computers and electronics value-added accounts for a little more than 7.5% of GDP.

The point is that the bankruptcy of GM and Chrysler is not an existential challenge for the US.  It does not threaten its industrial or manufacturing prowess.  The US will have to re-deploy its resources and move to more value-added sectors.  The flexibility of the US capital and labor markets will make it easier to do just that than in most other countries.

Marc Chandler, Global Head of Currency Strategy

Related posts:

• Chart of the day: Retail Sales
• Third quarter auto production to be significant boost to U.S. GDP
• Auto sales plunge in September
• U.S. auto sales plummet: everyone down over 30%
• April U.S. retail sales: upside surprise?

The Institute for Supply Management released its monthly manufacturing index.  The data shows that the manufacturing sector is still contracting with the headline number rising to 42.8 in May, up from 40.1 in April. This number was ahead of analyst expectations of 42 flat.  50 represents the dividing line between a contracting manufacturing sector and an expanding one.

The key to the ‘beat’ was new orders, which rose from 47.2 in April to 51.1. That says that new orders in the manufacturing sector are growing for the first time in 18 months.  You should also notice that customers’ inventories are moving in a big way as well, with that number registering too low and the contraction of inventories actually accelerating.  Translation: the much fabled de-stocking of inventories is gathering pace, setting the stage for inventories to make a positive contribution to GDP by Q3.  You should see these two trends as leading indicators for a recovery because they are the first two sub-indices to switch direction in this incipient bottoming process.  You should also notice that the overall economy is also now growing according to this index.

The market sees this as very bullish and has rallied despite what I see as a less positive personal income report.  In essence, June has started off with generally positive data surprises which is supportive of equities.

I recently said you should see industrials as a canary in the coalmine for recovery as these are cyclical stocks and industries, so the ISM Index is really one to watch going forward.

Compare the above chart to the one from December 2008 to see how New Orders have rallied and how customers’ inventories have contracted.

Update: See the video below where the ISM’s Norbert Ore gives his take on this.

Source
Manufacturing ISM Report On Business® – ISM

Related posts:

• Services sector still contracting, but shows more new orders
• ISM Manufacturing Index has hit bottom
• ISM: U.S. Manufacturing sector growing again
• ISM: September manufacturing data disappoint; market sells off
• ISM shows manufacturing sector close to recovery

A post from Reuters in overnight trading in Asia caught my eye.  It proclaimed “Asia faces up to challenges of global crisis." What I found particularly interesting about the post was the fact that the Asians had set up a $120 billion fund through the Asian Development Bank which excluded the International Monetary Fund (IMF) as the go-to organization in a crisis.  Reuters says the following:

Asia has been hard hit by the collapse in global demand largely because of the region’s heavy reliance on exports. Singapore, Hong Kong, Taiwan and Japan are in recession and growth elsewhere is the weakest in years.

"Poverty is worsening in many countries. Businesses are struggling. The extremely urgent climate change agenda could be affected," Indonesian President Susilo Bambang Yudhoyono said at the annual meeting of the Asian Development Bank.

"If all this goes unchecked, down the road we could see social and political unrest in many countries," he told representatives of the ADB’s 67-member countries, including finance ministers and central bank governors.

To counter the downturn, the ADB said it will raise lending by half and Asian governments agreed at the weekend to launch a $120 billion fund countries can tap to avert a balance of payments crisis.

You will recall that the Asians were forced to go cap in hand to the IMF for bailout funds after the Asian Crisis in the late 1990s.  This experience was very humiliating for some and caused extreme hardship as the IMF programs were rather severe and deflationary.  Resentment toward the IMF remains as a result. I see this development as an explicit measure to exclude the IMF in Asia.  I am not the only one who noticed this.  Marc Chandler the Chief Global Currency Strategist at Brown Brothers Harriman sent out a missive today titled "The Beginnings of an Asian IMF?" saying:

Back in the 1997-1998 Japan proposed an Asian-based IMF, the US objected and the issue seemed to be closed. However, during this crisis, a modified version appears to be in the works and without the international objections.

ASEAN+3 (Japan, China and South Korea) confirmed over the weekend that a $120 bln fx reserve pool will be established by year-end as the Chiang Mai Initiative is expanded. Participating countries can borrow up to 20% of their quote (agreed upon swap ). The other 80% can be accessed only after an IMF-like agreement. At first multilateral agencies, like the IMF and ADB, will be tapped for their expertise, but the intent to be independent is clear. Over time, their own surveillance unit will identify risks and provide oversight.

Separately, Japan offered a $60 yen-swap facility and to guarantee yen-denominated bonds (samurai) issued by developing countries. This is in addition to contributing $38.4 bln to the reserve pool (the same as China–including HK). South Korea will provide $19.2 bln. The four largest economies in ASEAN–Thailand, Indonesia, Malaysia, and Singapore–will each contribute $4.77 bln each, and the Philippines will pony up $3.68 bln.

Now, you should note that the CLSA China Manufacturing Index for April also came out overnight (see Econompic Data’s charts), with the index registering expansion in China for the first time in nine months. The reading was 50.1 in April versus 44.8 March.  This indicates that the stimulus efforts of the Chinese government are indeed having the wanted effect on demand as I suggested last week.  Therefore, I am officially abandoning my downbeat forecast for Chinese growth (see my predictions for 2009).

Asia looks poised to break away from the West, dare I say de-couple.  I am loathe to use that word because the inter-connectedness of the global economy has meant that negative demand-side shocks in the West will be felt in Asia as well.  Nevertheless, Asia looks to be developing an Asia-only dynamic and re-focusing on internal trade and politics.  This is good for Asia, but, for the West, not so much.

Source

Asia faces up to challenges of global crisis – Reuters.

Related posts:

• Pesek: Asia is de-coupling
• Stephen Roach: Downturn in Asia less severe, but recovery later
• China warns that the west’s quantitative easing is inflationary
• Jim Jubak joins the inflation made in Asia crowd
• Big Mac Index: Europe overvalued, Asia undervalued

Last month I noted that the ISM Manufacturing index indicated that the manufacturing sector was still contracting, albeit at a slower pace.  The latest data from the month of April show the same phenomenon.  likely, the index has already hit bottom.

Here’s what the Institute for Supply Management says in its release:

WHAT RESPONDENTS ARE SAYING …

• “International customers are having trouble getting cash for new orders, even though they need/want the equipment.” (Computer & Electronic Products)
• “Starting to see some signs of increased production and demand from some automotive customers.” (Fabricated Metal Products)
• “Business conditions continue to be soft, but agriculture-related products are still quite bullish.” (Machinery)
• “We are optimistic that things will change for the better in 3Q.” (Chemical Products)
• “Starting to hear of slight upticks in orders from some sectors of our business but not all.” (Electrical Equipment, Appliances & Components)

The chart below, also in the release, should give you a feel for how broad-based the improvement in the sector is.  Note the purging of customer inventories.  It might even suggest that the purge has gone too far.  That is extremely bullish for Q3 GDP, if not Q2.

Now compare this to a chart from December when things were the worst.

My conclusion is that we have hit bottom in manufacturing. Apparently, Goldman’s Jim O’Neill is right.

Source
Manufacturing ISM Report On Business® – ISM

Related posts:

• ISM: U.S. manufacturing contracting slower
• ISM shows manufacturing sector close to recovery
• ISM Manufacturing Index: New orders growing
• Philly Fed survey points to manufacturing rebound
• Philly Fed: Business outlook shows ‘notable improvement’

The March 2009 Manufacturing ISM Report on Business is out.  The widely-followed figure of 36.3 for the purchasing manager’s index (PMI) shows a manufacturing sector contracting quickly, albeit at a slower pace.  Last month, the PMI was 35.8 and it was 35.6 in January.  So this marks the second consecutive month of gain in the figure.

Nevertheless, with 50 as the dividing line between a contracting and expanding manufacturing sector, the data demonstrates that the U.S. manufacturing sector continues to have difficulty.

Just yesterday, I mentioned that the PMI and the Philly Fed Survey for February both indicated that manufacturing is still contracting and that calls for an imminent rebound are premature.

WHAT RESPONDENTS ARE SAYING …

• “We remain challenged to align our capacities with demand.” (Nonmetallic Mineral Products)
• “Most of the international markets have been reducing inventory levels and they are forecasting improvements in the next 4 to 6 months.” (Chemical Products)
• “Many pockets of improvement.” (Electrical Equipment, Appliances & Components)
• “Still very slow. No stimulus package for manufacturing. Down 30 percent.” (Fabricated Metal Products)
• “What we are feeling now is that customers aren’t making their final payments on equipment that has already been shipped.” (Machinery)

Source
March 2009 Manufacturing ISM Report On Business® – ISM

Related posts:

• ISM Manufacturing Index has hit bottom
• Services sector still contracting, but shows more new orders
• Services ISM survey falls indicating no recovery
• ISM shows manufacturing sector close to recovery
• U.S. ISM manufacturing survey hits 28-year low

Back in February I posted an article called “The bullish argument for the global economy” highlighting Goldman Sachs’ Chief Economist Jim O’Neill’s bullish view for the economy. O’Neill believed in February that a economic rebound was certainly possible due to fiscal and monetary stimulus. Paul Kasriel has made similar arguments.

While I do agree that fiscal and monetary stimulus have been great and may induce a cyclical rebound, I wanted to point out that he mentioned the Philly Fed Survey and the ISM surveys as potential leading indicators of recovery.

Both surveys are out and they have not been extremely robust.

Released on March 2nd, the ISM was marginally higher last month. But, with 50 as the border to recession, a PMI reading of 35.8 is deeply recessionary.

The Philadelphia Fed’s March Business Outlook Survey came out today and this is what it said (bolding mine):

The region’s manufacturing sector continued to contract this month, according to firms polled for the March Business Outlook Survey. Indexes for general activity, new orders, shipments, and employment remained significantly negative. Employment losses were substantial again this month, with over half of the surveyed firms reporting declines. Firms continued to report declines in input prices and prices for their own manufactured goods. Most of the indicators of future activity suggest that the region’s manufacturing executives expect declines to bottom out over the next six months, but the firms’ employment forecasts suggest continued weakness.

Indicators Reflect Further Contraction

The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, edged higher, from -41.3 in February to -35.0 this month. Last month’s reading was the lowest since October 1990. The index has been negative for 15 of the past 16 months, a period that corresponds to the current recession (see Chart). Continued weakness was evident in all of the broad indicators this month. The survey’s current new orders index declined nearly 10 points, to -40.7, its lowest reading since July 1980. The shipments index increased six points, but this follows a record low in February. The survey’s current inventory index declined precipitously this month, from -24.3 to -55.6, its lowest reading in the history of the survey.

Basically, the Philly Fed’s survey was big fat bust. No matter, the market is up nearly 160 points as I write this. So, is this a harbinger of good things to come or should I expect Jim O’Neill to change his tune?

Sources
February 2009 Manufacturing ISM Report On Business® - ISM
March 2009 Business Outlook Survey – Federal Reserve Bank of Philadelphia

Related posts:

• Philly Fed: Business outlook shows ‘notable improvement’
• Philly Fed survey points to manufacturing rebound
• ISM: U.S. manufacturing contracting slower
• ISM: U.S. Manufacturing sector growing again
• U.S. ISM manufacturing survey hits 28-year low

The ISM Manufacturing Survey came out. The PMI index was 35.6, up from 32.4 in December. It was bad (50 is the tipping point between recession and growth), but it was not all bad. There were two industries with growth: textiles and petroleum. Moreover, the declines in new orders, productions, backlogs, etc. were not accelerating the way they were last month. Perhaps a bottom is forming here – especially on pricing.

I see this report as a net positive. The trend is not a clear acceleration to the downside as it was in December. Note thew areas highlighted in red above.

Below is a video from Bloomberg in which you can get a feel for the differing views on what this data says about manufacturing and the economy going forward.

Sources
January 2009 Manufacturing ISM Report On Business® – ISM

Related posts:

• U.S. ISM manufacturing survey hits 28-year low
• Services ISM survey falls indicating no recovery
• ISM shows manufacturing sector close to recovery
• Does positive growth in Q2 or Q3 mean the recession is over?
• Quote of the day: Michael Douglas as Gordon Gekko

The Institute for Supply Management released its monthly manufacturing survey for the Unite States today. The data show a fall from 36.2 to 32.4 where 50 represents the divide between recession and expansion. The 32.4 figure represented the lowest figure in 28 years, while new orders were at their lowest since 1948, suggesting that future demand for manufactured products will be extremely weak.

The chart below released along with the survey demonstrates that manufacturing weakness in the U.S. extends across all measured dimensions and that the decline is accelerating. This should mean that job losses in the sector will be quite large going forward, especially because new orders are down substantially.

To assess how this downturn compares with previous ones, one should not only look at the absolute numbers but also the speed and magnitude of the change in outlook. First, as to speed, we are seeing the fastest drop-off in manufacturing since at least 1981 as measured by the year change in the index. However, when looking at the magnitude of change we have not reached the levels seen in that recession.

The chart above shows the rolling change in the 12-month average index readings. By averaging out the last twelve months one can get a better read of the duration and depth of change. As you can see, the early 1980s were much worse than what we are seeing today so far. Moreover, manufacturing was a larger percentage of the U.S. economy at that time.

So the overall message is that the manufacturing situation is weak right now. However, as with employment trends, the early 1980s and the 1973-1975 period both were more severe downturns than what we have experienced to date. Nevertheless, we should expect the negative trends to continue into 2009, eventually making this recession deeper than either of those two.

Sources
December 2008 Manufacturing ISM Report On Business® – ISM
Fresh fall in US factory output – BBC News

Related posts:

• Philly Fed survey points to manufacturing rebound
• ISM shows manufacturing sector close to recovery
• US manufacturing suffers a steep decline
• ISM Manufacturing Index has hit bottom
• ISM Manufacturing Index: New orders growing

The punderati has been especially kind to China. As the global recession takes hold, the conventional wisdom has moved from the largely debunked de-coupling of China to a story where China slows, but much less so than the west. But is that really how things will play out?

Marshall Auerback certainly thinks China faces some stiff headwinds, but he believes these are issues that can be overcome. Debt levels are extremely low and savings levels very high amongst the consuming masses there. Mark Mobius believes that the emerging markets generally are shortly due for an upswing. However, I would like to take a more pessimistic tack here.

You may recall that just yesterday I quoted from an Indian article which underlined the cratering of export demand for China. Let me add to those thoughts with the following analysis:

1. The Chinese are highly dependent on manufacturing exports to maintain growth. Most of their growth in the last two decades has come from export demand subsidized by a cheap currency and massive numbers of relatively low wage workers.
2. However, demand from the west is cratering because of the worst recession since the 1930s.  Because China’s export economy is geared to the west, this has had a devastating impact on export demand.
3. As a result, the Chinese will need to switch to a focus on domestic demand. Where is this demand going to come from? Granted they have no debt. However, people don’t just start buying stuff in the middle of the greatest downturn in 75 years. Chinese people see these and must know that caution is warranted.
4. Moreover, their residential property market has imploded as has the stock market. This too must work against the psychology of increased domestic spending as the wealth effects here are significant.
5. And the banking system was already fragile. My general thinking would be there are huge hidden losses at Chinese banks as a result. Therefore, lending capacity has to be restricted going forward. I would not be surprised if we saw a reduction in the money multiplier in China as well.
6. Ultimately, I would argue that the Chinese domestic consumer is not going to consume more.   In fact, they would need to consume a lot more given the GDP per capita of the average Chinese person in order to replace the lost demand from the West.  But, I believe they will consume less given the factors enumerated above.

I await more data from China. In the meantime, I remain skeptical but open to persuasion.

Sources
China’s industrial output growth stalls – Sydney Morning Herald
China ‘repeating US mistakes of 1930s’ – Sify.com, India
The Great Crash of China – Far Eastern Economic Review
China’s Output Growth to Drop Further, Minister Says – Bloomberg
China: Industrial Output – Bloomberg
China Industrial-Output Growth Is Weakest Since 1999 – Bloomberg

Related posts:

• China cutting overcapacity
• China can handle collapse of speculative inflows
• Marc Faber: China’s numbers are fake
• China wants all of Repsol’s Latin American oil assets
• The world’s biggest bank is Chinese

Despite the plethora of data that has come out recently, one thing that has occasioned very little comment is the outlook for U.S. exports. Exports are generally not a big factor in the subset of companies involved in the ISM survey, but the plunge in export orders to 34.5 suggests that U.S. exports, hitherto a support in an otherwise collapsing economy, could be in big trouble as well.

U.S. November ISM Non-Manufacturing Index: Summary

	Nov.	Oct.	Sept.	Aug.	July	June	May	April	March	6-mo Avg
	2008	2008	2008	2008	2008	2008	2008	2008	2008
Composite Index	37.3	44.4	50.2	50.6	49.5	48.2	51.7	52	49.6	46.7
Export Orders*	34.5	50	50.5	44.5	47.5	52	54	48.5	55	46.5
Import Orders*	40	52	47.5	46	49	50.5	48	50	54.5	47.5

U.S. November ISM Non-Manufacturing Index: Summary, December 3, 2008, Bloomberg

Note that the export order index is falling faster than the import order index. The recent strength of the dollar is clearly having an impact. The combination of these two sub indices of the manufacturing ISM shows the substantial positive differential of exports over imports has disappeared. The same sub indices for the non-manufacturing ISM may be telling us once again that the whole trade improvement that was such a positive for the U.S. economy in recent quarters is about to disappear and may even reverse. This ominously echoes what happened in the wake of the Asian Financial Crisis in 1997/98, where a flight into the dollar from the Asian currencies triggered a huge deterioration in the U.S. current account and a further hollowing out of the country’s manufacturing base. With Detroit already on the verge of collapse, the decline of the Korean won from 900 to 1400 massively improves Korea’s competitiveness in the U.S. auto market. If dollar strength persists, then no bailout or no bailout, GM, Ford and Chrysler are toast.

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