The Census Bureau released the full report for December Manufacturers' shipments, inventories, and orders. Although the full report does not get as much press as the advance report on durable goods released a week earlier, it contains far more information and provides a good read on the entire manufacturing industry.
As I explained in my article on the January retail sales report, the headline increase or decrease each month is based on data adjusted for seasonal effects and holidays. While these adjustments can help compare data in consecutive months, the value diminishes almost entirely when comparing data from one year to the next. For this reason, I focus on the year/year growth rates to determine the relative health of the manufacturing industry and the various sectors in the report.
Manufacturing Shipment Growth Continues to Decline
Throughout 2010 and the first half of 2011, the year/year growth rate in manufacturing shipments trended around 12%. Growth began to decline toward the end of 2011 and has steadily dropped ever since. For the past six months, the growth rate has bounced around the low single digits and ended the year barely positive.
Looking at this chart alone, one would not think that stocks were trading near all-time highs. Investors apparently believe that growth has stabilized and will turn up later in the year. Although the January manufacturing ISM slightly beat expectations, inventory replenishment played a large part of that. The growth rate in new orders (also reported by the Census Bureau) does not yet confirm a change in trend. New Order growth has led the decline in shipments and has turned negative over the past several months. While it is true the markets are forward looking, investors are clearly ignoring the current trends in manufacturing data to project a late-year recovery.
Machinery Shipments Also Showing Weakness
For the past several years, machinery has been one of the strongest segments in the manufacturing space. Over the last five months, however, growth rates have started to deteriorate.
One of the biggest contributors has been farm machinery, which started to decline in May 2012 and bottomed in August as a result of the drought. Although the growth rates have started to climb back, they are still running around 10% below last year. A couple of the stocks to watch in this space are Deere & Company (DE) and AGCO Corp. (AGCO). It remains to be seen whether the machinery segment can get back to the consistent 10%-15% growth that occurred from 2010 through the first half of 2012.
Heavy Duty Truck Growth Has Turned Negative
The Heavy Duty truck segment continues to struggle. December marked the fifth month in a row with a yearly decline in growth. This is due, in large part, to the strength in shipments during the same period in 2011. Interestingly, the shares of one of the leading companies in this space, Paccar Inc. (PCAR), bottomed six months ago and has recovered significantly in anticipation of future growth. Navistar International (NAV), on the other hand, bottomed a couple months ago but the shares are still only about half the price they were a year ago.
No Turnaround In Sight for the Steelmakers
After a growth spike in early 2010, the steel industry has slowly deteriorated. Growth has actually declined each of the past 7 months and continues to gain momentum to the downside. The major problem in this space has been the price of steel, which has declined nearly every month for the past year. This has been a significant drag on United States Steel (X), which now trades at $22 after trading at over $180 per share in 2008. ArcelorMittal (MT) has also struggled and now trades at about 15% of what it did in 2008. For both of these companies, watch for an increase in global steel prices and confirmation from the manufacturing shipments to signal a buying opportunity.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.