Manufacturing - Some Red Flags

by: Cullen Roche

Just a few brief thoughts on this morning’s manufacturing data which continues a streak of weaker than expected data in this space.

Total industry production was very weak at -0.5%. The manufacturing component registered a -0.4% decline. Analysts had been expecting a 0.1% rise. Durable goods were particularly weak at -0.6%. Total capacity utilization declined to 77.8 versus expectations of 78.3. In other words, this report was kind of a disaster.

As you can see in figure 1 the economy remains well below its potential. The current readings are still consistent with many past recessionary environments. So it’s not surprising that this environment still feels like a recession to many. That’s because, in relative terms, we’re in the midst of a very meager recovery.

Figure 2 updates the composite real-time PMI index which declined from 2.5 to 1.1 as of this morning’s data. In addition to the industrial production data the NY Fed reported a weak manufacturing environment with the first negative reading there since January. The composite index is basically hugging the contraction line so manufacturing is a very weak segment of the economy.

A few key takeaways:

  • This is all consistent with a low inflation environment.
  • This is all consistent with a muddle through environment.
  • This is not yet a recessionary environment.
  • This is nothing to cheer about.

(Click to enlarge)

(Figure 1 – Total Capacity Utilization)

(Click to enlarge)

(Figure 2 – Composite Real-Time PMI)