Evidence has been turning up in the monthly economic data flow that indicates American industry is slipping, and given that stocks keep rising, it seems nobody is noticing. Your author here has been writing about our shaky economy for several months now, but sector-specific reports released recently show the manufacturing situation seems to be deteriorating even further. At this point, I think it is time investors take heed.
We received three economic data points this week reflecting deterioration in manufacturing and factory production. The monthly Industrial Production Report and two regional manufacturing data points from the very important New York and Philadelphia Federal Reserve Bank regions indicate economic contraction is occurring in the manufacturing sector.
The Industrial Production Report, published by the Federal Reserve this week, showed that industrial production declined by 0.5% in April. It gets worse, though, as the prior month result was also adjusted lower to reflect growth of 0.3% rather than the 0.4% growth first reported for March. When a prior month base is adjusted lower, it serves as a boost to the current month growth rate, but the 0.5% decline still remained well worse than the economists' consensus forecast for a slighter 0.2% decline.
Data have been softening in manufacturing generally speaking, and this report showed manufacturing specific production down 0.4% in April, versus economists' expectations for a 0.1% gain. The April decline matched against the revised March decline of 0.3%, which was adjusted lower from -0.1% previously. The news was bad all around.
When production falls off, capacity goes underutilized, and so in April, capacity utilization deteriorated to 77.8%, down from 78.3% in March. Economists were way off again here, as the consensus expectation was set at 78.3%.
The New York Bank Region
The New York Federal Reserve reported on manufacturing in the New York region this week as well. We covered the report in detail in our article entitled, Poor New York, Sinatra Would Sing a Different Tune Today. Summarizing, the Empire State Manufacturing Survey General Business Conditions Index fell into contraction territory in May, falling to an index mark of negative 1.43, from +3.05 the month before. Like the national Industrial Production data, this result also fooled economists who saw the index improving slightly this month to 3.75. The New York region reflects on national activity, given it serves as home for IBM (IBM) and many other major businesses with national if not international reach.
Philadelphia Bank Region
The Philadelphia Federal Reserve likewise measured manufacturing activity in its banking region this week. The Philadelphia Federal Reserve's Business Outlook Survey for the month of May showed its General Business Conditions Index slipped to negative 5.2. The figure reflects contraction in the Philly Fed Bank area manufacturing sector, and compared against an April reading of +1.3. For the third time in a week's worth of manufacturing missteps, economists expected the index to reflect a much better circumstance than it did, with the consensus forecast set at +2.2 for the index.
Some 29% of those surveyed said business activity decreased in May (26% in the New York area), whereas 24% reported business expansion (25% in NY). All the measures of current activity weakened in the Philly region, and significantly so. The New Orders Index dropped deeply into negative territory, measuring -7.9 in May, versus +1.0 in April. The Shipments Index dropped even more so, to -8.5, from +9.1 previously. Meanwhile, inventories increased, seemingly without commensurate demand for manufactured goods. Even the Employment Index declined in Philly, dropping 2 points to -8.7. Employment is a lagging indicator, and this may indicate some sense of lasting softness in the area. Like in New York, the average workweek declined, which portends further capacity utilization deterioration nationally in next month's Industrial Production Report. Still, Philadelphia Bank area manufacturers have stronger future expectations than they did last month, but I find these prospective measures are often volatile, and good moods can be fleeting. In the New York area, manufacturers' perspective of the future deteriorated.
Despite the bad news from manufacturing this week, the SPDR Dow Jones Industrial Average (DIA), SPDR S&P 500 (SPY) and the PowerShares QQQ (QQQ) each gained on the week, from approximately 1.5% to 2.0% as seen here. Each time a poor economic reading is reported traders raise the Fed flag, and call it a reason to rally on continued Federal Reserve support. However, at some point, we are going to have to accept that we have a structural issue with regard to unemployment, which is worthy of its own discussion, and that the economic recovery is going to run at a sluggish pace with interruption by recession here and there. That's if everything goes by the Fed's plan, which seems unlikely to me.
We have seen the industrial softness in the most recent company specific data of several major manufacturers. The latest earnings reports or earnings warnings of Caterpillar (CAT), General Electric (GE) and IBM drove each of those manufacturing giants lower recently. The earnings estimates of all three have been adjusted lower over the last 90 days also, some more than others.
Obviously, the issues of American manufacturers are not all due to domestic demand. In fact, European recession is certainly weighing more heavily, and a slowing pace of economic growth in China is weighing as well. Still, this latest data reported this week, all of which measures second quarter activity, offers investors a note of caution. Our economy, and especially the manufacturing sector, is collapsing further into Q2. The data reflect poorly upon the broader economy as well, and should be duly noted. I'm going to look at the massive level of undocumented unemployment next, so you might want to follow along.