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Manufacturers Hindering Market Gains By Charles Payne

Jan. 02, 2015 1:26 PM ET
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By Jennifer Coombs, Research Analyst

The market's resolution to rally was apparently broken today as the major equity indices started the first trading session of the year in the green only to collapse by mid-morning. The early culprits hindering growth were out of China and Europe as the European Central Bank (ECB) announced a growing risk of unstable prices and China's purchasing manager's index (PMI) dropping to 50.1 in December to just above the neutral 50-level. Oil continues to be volatile and priced low, while the US dollar has gained strength relative to other currencies by the highest level in nearly nine years. However, it was domestic data that actually contributed the most to market weakness today.

ISM's December US manufacturing report for the purchasing managers' index had actually been improving relative to other measures in the manufacturing sector, and we note that this should help to limit the impact from the slowdown noted in today's release. The ISM index came in at 55.5 for December, which was 3.2 points lower than that of November, making it the slowest monthly growth in six months. New orders slowed substantially during the month to 57.3 from an impressively strong reading of 66.0 in November. Backlog accumulation dipped also, falling to 52.5 from 55.0 the month before, and production slowed to 58.8 from 64.4. A big positive in the report was employment, which increased by 1.9 points in December to come in at 56.8 - quite a solid reading for this component. Additionally, there is an apparent tightening of the supply chain due to strength from slowdowns in supplier deliveries. The biggest drop, as noted by the chart below, was in the input prices component where the index dropped by 6 points to 38.5 in December. The drop in prices was to be expected given the big drop in fuel prices, and wild swings are not so unusual for this reading. Inventories noted a slowdown in the month and the need for restocks is positive for both production and employment outlooks going into 2015. Overall, the ISM number hurt today's market rally. However, the drop in prices paid is a potentially positive data point for companies, but deflation will continue to cause some concern. Various manufacturing reports point to a slowdown in the later quarter of the year, and this report seems to support that.

Construction spending in the month of November declined slightly by 0.3% after a sharp 1.2% increase in October, while consensus expectations were for a gain of 0.5%. Overall, the decrease was led by public outlays, which decreased by 1.7% in the month after popping 2.8% in October. On par with the month before was private residential spending, which increased by 0.9% in November - this continued gain among private residences is very encouraging. On the other hand, private nonresidential spending during the month of November dropped 0.3% after a gain of 0.1% in October. Year over year, total construction spending outlays were up a healthy 2.4% in November after a 4.0% year-over-year increase in October. All in all, the construction sector slowed during the month and has to potential to drag down fourth quarter GDP. According to the Fed manufacturing reports so far, construction might not get a particularly positive boost in December 2014 either.

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