By New Deal Democrat
OK, probably ending, since nothing is perfect. But if there are reasons to be more concerned about 2017, this morning's ISM report is very strong evidence that the shallow industrial recession we have had for the last year is ending, either now or within the next 3 months.
Last month I wrote that "For me to be confident that this slowdown was ending, I would want to see new orders spike to at least 54."
Well, as forecast by the regional Fed reports, New Orders blew out to the upside at 58.3. With the sole exception of the month of September 2001 (for obvious reasons), there has never been a reading over 55 in a downturn in industrial production that hasn't either coincided, or been shortly followed by, the end of that downturn. This is true all the way back to 1948, although the below graph (thru January), for clarity, just focuses on the last 20 years:
Here is a close-up for the last 10 years, updated through this morning, comparing ISM new orders (red) with industrial production(blue):
Let me put this about as strongly as I can: this has been the single most important datapoint so far this year.
From Bonddad: Let me add a few points:
First, the anecdotal comments are unanimously bullish:
- "Unemployment rate is low in our county, making it hard to find workers. We are understaffed and running lots of overtime." (Plastics & Rubber Products)
- "Business in telecom is booming. Fiber plant is at capacity." (Chemical Products)
- "Current trends remain steady. No issues with delivery or costs." (Computer & Electronic Products)
- "Capital equipment sales are steady." (Fabricated Metal Products)
- "Requests for proposals for new equipment [are] very strong." (Machinery)
- "Government is spending again. Have received delivery orders." (Transportation Equipment)
- "Things are starting to pick up. Our business is seasonal and it is that time of year." (Printing & Related Support Activities)
- "Business conditions are stable, little change from last month." (Miscellaneous Manufacturing)
- "Incoming sales are improving." (Furniture & Related Products)
- "Our business is still going strong." (Primary Metals)
Not one shows weakness.
Why this is happening? The oil market is contracting, lowering their capital investment needs. International markets are weak and the dollar is still strong. It's possible we could see equipment replacement drive demand:
Global sales of construction equipment such as bulldozers, diggers and dump trucks are expected to expand in 2017 after five years of shrinkage, according to Off-Highway Research, a consulting firm.
Machinery manufacturers including Caterpillar of the US and the UK’s JCB have been hit since 2012 by falling demand, which is rooted in China’s economic slowdown and the negative impact this has had on industries including construction and mining.
Off-Highway Research is expecting a rebound in global unit sales of construction machines in 2017, driven by the gradual replacement of aging vehicles and its prediction of an improvement in commodity prices.
To that end, consider this chart of the XLIs, which have recently rallied:
And a majority of the ETFs 10 largest holding are either stronger than the SPYs or improving: