Is a Manufacturing Rebound in the Works?

NEW YORK (CNNMoney.com) -- A key measure of manufacturing activity rose for the fourth straight month in April, suggesting the sector may be stabilizing even though the indicator has been at the contraction level for 15 months in a row, a purchasing management group said Friday.
The Tempe, Ariz.-based Institute for Supply Management said its manufacturing index rose to a reading of 40.1 in April from 36.3 in March (see chart above, data here). A reading below 50 indicates manufacturing activity is shrinking. Economists had forecast a reading of 38.4, according to consensus estimates gathered by Briefing.com.

"The decline in the manufacturing sector continues to moderate," said Norbert Ore, chair of the ISM's survey committee, in a statement. "This is definitely a good start for the second quarter."

The index also showed that new orders and production increased in April compared with March.

According to the ISM:

A PMI in excess of 41.2%, over a period of time, generally indicates an expansion of the overall economy. Therefore, the PMI indicates contraction in both the overall economy and the manufacturing sector. Ore stated, "The past relationship between the PMI and the overall economy indicates that the average PMI for January through April (37%) corresponds to a 1.3 percent decrease in real GD. In addition, if the PMI for April (40.1%) is annualized, it corresponds to a 0.3% decrease in real GDP annually."

Assuming that the PMI continues to increase in May and June from the 40.1 April reading, there would be a good chance that second quarter real GDP would be positive, or at least very close to zero. Also, the 7.2 percentage point increase in the PMI from the December bottom is the largest four-month increase in the index since January 2004.

As Larry Kudlow pointed out Friday night on "The Kudlow Report," the March index for New Orders (47.2) is now almost back to the level of 50 that would indicate an expansion manufacturing activity (see chart above). Further, the 19.1 percent increase in the New Order Index from Dec. to April is the largest 4-month increase in the index in more than 7 years (since March 2002), and the 14.1 percent increase in the Production Index over the same period is the greatest 4-month increase since February 2002.

Comments

[jeandit75]

NO, <50 = contraction...stop propagatig hopeless hope

2009 May 02 04:50 PM

[LilBob]

I have to agree with Mark here to some degree. The general consensus right now is that we're going to start pulling out of the recession in the latter half of this year or, possibly, early 2010. It's important to remember that in the US we don't manufacture consumer goods directly, so much as we do the machinery and control systems that go into the plants that manufacture the consumer goods, so there is some rationale for assuming that domestic manufacturing may pick up in the second half of this year as retail jobbers prepare to restock retail inventories which have dwindled over the course of the last year.

That being said, we're still very much subject to currency fluctuations. Germany and Japan are two significant competitors in terms of production machinery and the balance in value between the US Dollalr, the Euro and the Yen will be of primary importance as US firms compete for limited retrofitting dollars.

2009 May 02 06:46 PM

[LilBob]

Error in wording there, I should have said "limited retrofitting capital," instead of "limited retrofitting dollars".

2009 May 02 06:51 PM

[traden4alpha]

The last time the ISM was this low, we still had 12 months of market declines ahead of us. And that's assuming that this housing/credit/global crash is no worse than the dotcom crash. But does anyone honestly believe that this crash didn't do more damage to the economy than the dotcom crash?

The "improvement" in ISM and other numbers only means we gone from plummeting at a record pace to plummeting at fast pace.

2009 May 02 07:01 PM

[The Geoffster]

Does the uptick mean anything?

2009 May 02 09:40 PM

[Carlos Lam]

Mark, are you dreaming? The BEA noted that goods-producing industries (i.e. forestry, mining) payrolls decreased $15.3 billion in March. Until the raw materials producers payrolls start consistently increasing, we're not going anywhere.

2009 May 02 09:52 PM

[William Cowie]

This is a VERY unscientific sample, but our order book has increased significantly this past month, and we're in a highly cyclical manufacturing business. We are beginning to hear similar reports from some (not all) of our vendors. FWIW

2009 May 03 12:44 AM

[Chris Uhlir]

With consistent large loss of jobs this is pointless. It's just basic demand coursing through the system. A Walgreens manager found he needed to restock masking tape and fruitloops. The level of economic activity brought on by the housing boom/bust is not going to come back quickly.

2009 May 03 02:03 AM

[Lok Sang Ho]

My judgement: in the absence of unforeseen blunders from the government or natural disaster of sorts, better than 50% chance for a Q to Q GDP rebound in the third quarter; better than 90% chance for a Q to Q GDP rebound in the last quarter.

2009 May 03 08:59 AM

[Kunst]

This recession is coming to an end. Unfortunately, the next one is right on its heels.

2009 May 03 01:29 PM

[Alphameister]

Final demand has held up surprisingly well while businesses have slashed inventories based on "falling off a cliff" rhetoric that is proven to have been greatly exaggerated. That certainly suggests a rebound in manufacturing in the not-so-distant future.....good news for the US and GREAT news for China.

2009 May 03 01:34 PM

[Old Trader]

While there's some increase in mfg., I think that its important to remember that inventories have fallen about as low as they can go, assuming firms intend to stay in business, so there HAS to be an uptick at some point. The key question is for how long?

2009 May 03 09:49 PM