Over the course of the last week, we've received several manufacturing sector reports, which offer an opportunity now for a timely review of the sector. The slew of reports culminated in Monday's reporting of the ISM Manufacturing data, and also include last week's data from the Federal Reserve branches of Dallas, Richmond and Kansas City, plus the latest Durable Goods Orders data and Chicago Purchasing Managers Index. Tuesday brings a fresh update on Factory Orders as well.
The latest ISM Manufacturing Report showed the Purchasing Managers' Index (PMI) inched higher to a mark of 53.4% in March, up from February's 52.4% read. Economists surveyed by Bloomberg forecast a less robust gain to a consensus forecast of 53%. A close 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. This index is particularly important these days as it flirts with the breakpoint between economic expansion and contraction. Historic data indicate that a reading above a mark of 50 generally reflects expansion in the manufacturing sector, where readings below 50 indicate sector recession.
Last week, we received a slew of key data that should prove useful to measure the health of the manufacturing sector. It seems most appropriate to begin this retro-discussion with the important Durable Goods Orders data for February. After a difficult result in January, Durable Goods Orders came up short again in February. New Orders for Durables increased 2.2%, missing the consensus of economists' views, which had been set at +2.9% for the month, based on Bloomberg's survey. The data point was partially impacted by an upward revision to January, which was hiked to -3.6% from -4.0% at its initial reporting. Still, the month missed the mark even when accounting for the revision. Excluding transportation, thus eliminating the influence of the high ticket items that tend to skew the overall data wildly month-to-month, orders rose 1.6%. This data point, while fighting the tide of an upward revision to January's result, still exceeded the economists' consensus for a 1.5% increase.
Breaking out manufacturing from the Durables Report, we see that the sector experienced a 2.8% increase in new orders. That was certainly good news and a positive sign for the sector. The month's increased orders marked a nice change from January's 5.1% decline. Still, February's ordering activity remained 2.5% below December's activity. Furthermore, Manufacturing Shipments were down 0.5% in February, following a 0.7% drop in January.
Last week's regional Federal Reserve branch manufacturing reports offer a different message than ISM's headline did Monday. Across Dallas, Richmond, Kansas City and Chicago, the message was the same, slower growth which surprised economists on the short side. The Dallas Fed reported its Business Activity Index fell to 10.8 in March, from 17.8 in February. The monthly reading missed the economists' consensus forecast for 15.5, and was deeply short of the lowest forecast for a reading of 15.0, as measured by Bloomberg. The Richmond Fed Manufacturing Index dropped sharply to a mark of 7, from 20 in February. This index reading, like Dallas, again deeply missed the economists' consensus forecast for 18 and fell under the lowest forecast for 15. The Kansas City Fed Manufacturing Index slipped to 9 in March, from 13 in February. Finally, the Chicago Purchasing Managers Index retreated to 62.2, from 64.0 in February. It was likewise short of economists' views for 63.0 in March.
The message seems clear. Manufacturing expansion is slowing in March at a pace faster than expected by economists. It's unclear at this point, based on the data, whether the manufacturing sector might contract after nearly 3 years of expansion or not. However, anecdotal reports I receive about the Greek economy and my view of the situation seem to say Greece and Europe will deteriorate worse than the talking heads atop the troika are reporting. With 20% of our exports selling into Europe, we cannot escape impact. It's also my view that China will pay the price for its exaggerated economic expansion effort, and find a hard landing of its own before long. Finally, I fear the Iranian trigger could so disrupt global trade that a global recession will ensue with costly results for overextended central banks and currencies.
Thus, I reiterate my view that the day's market rally on manufacturing data was misplaced, with the SPDR S&P 500 (SPY) closing up 0.7% on the day. The Industrial Select Sector SPDR (XLI) was up more than the broader indices before giving way toward the close (+0.65%). Within the industrials group, sector players Cummins (CMI), Emerson Electric (EMI) and Caterpillar (NYSE:CAT) posted gains of roughly 1% or so, while Honeywell (HON), General Electric (GE), UPS (UPS) and United Technologies (UTX) were about unchanged or fractionally lower. I expect any gains made on nascent data will evaporate.
See also this article for more on the ISM Manufacturing Report.