Manufacturing Data Show Softening Economy

by: Markos Kaminis

The Chicago Purchasing Managers Index carried a clearly negative message Tuesday, with the Institute for Supply Management (ISM) saying, "key aspects of the report pointed toward a weakening economy."

The Chicago PMI Business Barometer Index dropped to 60.2 this month, from 62.2 in December. It was yet another economic data point leaving economists looking lost. Economists surveyed by Bloomberg were expecting the index to rise to 63.0. More importantly, the decline leaves them to survey whether indeed the economy is slipping into just a slow slug growth rate like the Federal Reserve expects or into a legitimate recession.

The service sector continues to dominate the U.S. economy, and so the manufacturing sector remains secondary today. It also has been buoyed by global demand, and so is an imperfect measure of domestic well-being. Still, however loose a tie manufacturing has to the domestic marketplace, it represents a great hope for many.

President Obama, for one, is hopeful the U.S. might move forward to restore its industrial base, with a keen eye toward alternative energy. Mitt Romney, who appears set to win the Florida GOP primary, is willing to go a step further to ensure U.S. companies have a better footing with perennially accused trade cheater China. Manufacturing is clearly an important cog for U.S. economic progress. The leaner sector, which clearly benefited from the financial crisis and recession driven restructuring of organized labor contracts like those at General Motors (NYSE:GM) and Ford (NYSE:F), might just have a chance given some of these described actions and other plans for it.

Looking at the Chicago PMI Report, each component measure declined to a less expansionary point, with the seasonally adjusted new orders Index falling to 63.6, from 67.1 in December. New orders are of course a critical indicator of the road ahead. Because of the slower pace of ordering, order backlogs fell into territory marking economic contraction, with that component index at 48.3 now, from 57.3 in December. The shares of important industrials General Electric (NYSE:GE), Honeywell (NYSE:HON), Caterpillar (NYSE:CAT) and Deere (NYSE:DE) were all in the red Tuesday as a result.

Further inspection of the data shows the production index eased to 63.8 from 64.9 in December. The inventories index likewise fell to 51.6 from 52.0 in December. Perhaps of greater interest to most, the employment index declined to 54.7 from 59.2 in December, showing less propensity to hire among manufacturers. This certainly played a role in the slippage of employment services stocks Tuesday, with Monster Worldwide (NYSE:MWW), Korn Ferry (NYSE:KFY) and Manpower (NYSE:MAN) down approximately 2% to 3% each.

Supplier deliveries improved, but this only says to me that there exists an environment of less demand. However, production material lead time lengthened significantly, which would counter that argument unless production material capacity has been left idle due to slowing demand. I expect there are some seasonal issues at play here, for instance, with regard to irregular maintenance of facilities and plants that may be occurring now.

Further observance of the manufacturing sector is advised now, as it may show the impacts of European strife and the global slowing described, warned of, and expected by the World Bank and IMF, not to mention by yours truly. Wednesday, we'll receive the ISM Manufacturing Index, which will offer a better national view, where the Chicago PMI measures the Midwest. With regard to ISM's report for January, economists are once again looking for improvement, with the index seen rising to 54.5, from 53.9 in December. I expect another let down is pending, and that manufacturing is indeed finding a slower growth point for now.

There are all sorts of pressures on the sector, especially within defense, where the U.S. and many other nations are reducing funding. Though shares of Raytheon (NYSE:RTN), Lockheed Martin (NYSE:LMT), Northrop Grumman (NYSE:NOC) and Alliant Techsystems (ATK) traded mixed Tuesday. Still, with fewer orders coming to manufacturers from both private and public sectors, it seems the world may take a break from its fantastic global development of the last decade.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.