Manufacturing Report Offers Disturbing Data For The Discerning

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According to the ISM Manufacturing Index, the manufacturing sector and the overall economy grew at a faster pace in March 2012. However, closer inspection of the data shows the pace of New Order growth slowed, export growth dropped sharply, prices ran high and customer inventories were too low. In other words, the details reveal something less appealing than the headline seen in the popular press, as usual. Given that this index has flirted with the threshold to sector contraction since last summer, there seems little reason to draw much comfort from it today. Sector-relative stocks were flat to higher on the news Monday and the broader market was also in the positive, but I see little reason for it.

March's ISM Manufacturing Report showed the Purchasing Managers' Index (PMI) inched higher to a mark of 53.4%, up from February's 52.4% read. Economists surveyed by Bloomberg forecast a less robust gain to a consensus forecast of 53%. The index is particularly important these days as it flirts with the breakpoint between economic expansion and contraction. Historical data indicates that a reading above a mark of 50 generally reflects expansion in the manufacturing sector, where readings below 50 indicate sector recession.

This latest result for March is reassuring as far as the headline metric is concerned, as February had marked a decline from January's 54.1 read. Thus, March's improvement hedged some of the market's concern that a new dark trend might be brewing. The positive trend of growth over 32 consecutive months seemed threatened, and in my view, remains so. Manufacturing as measured by the ISM metric has fluctuated over the last year, but not ventured far from breakeven since last April's 59.7% reading. As a matter of fact, since about July of 2011, the measure has offered mostly reason for concern due to its proximity to breakeven.

New Orders, as measured by a component index of ISM's PMI, fell in March to 54.5 from 54.9. In so doing, it still produced its 35th consecutive month of growth. Historically, though, the crossbar for New Orders has proven to be higher than the 50 threshold for the overall PMI, at 52.3% here.

Reflecting on the positive data within the report, both production and employment were significantly higher in March. However, customers' inventories were found "too low" for growth. Also, increasing prices played a role in the index's growth again this past month. Only natural gas and some steel prices were lower in March, while most other commodities, including steel for some, saw increased pricing.

Of the 18 industries measured, 15 of those reported paying increased prices. If prices rise on increasing demand due to economic prosperity they are bearable, but if they're higher on supply constraints or other than demand driven inflation, then the factor could disrupt the economic machine.

Another important negative bit of information confirmed some existing market concern. New export orders continued to grow, but at a much slower pace in March. The index quantifying change here fell 5.5 points, to 54.0 in March. Four industries reported decreased export orders in March, including Nonmetallic Mineral Products; Computer & Electronic Products; Electrical Equipment, Appliances & Components; and Apparel, Leather & Allied Products. I think we can attribute a good portion of any softness here to Europe.

So, while the broader market found fuel on the headline data point, with the SPDR Dow Jones Industrial Average (NYSE: DIA) up more than half a point, I see little reason for it. The Industrial Select Sector SPDR (NYSE: XLI), was up more than the Dow on Monday. Within the index, sector leaders General Electric (NYSE: GE), United Technologies (NYSE: UTX), 3M (NYSE: MMM) and UPS (NYSE: UPS) held flat, while Caterpillar (NYSE: CAT), Boeing (NYSE: BA) and Union Pacific (NYSE: UNP) gained from 1% to 2% deep into the afternoon. There was a bit of support from overseas data as well, but looking forward, the same old factors continue to portend trouble in my view. That trouble should impact global manufacturing over the next year or more.

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

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