Monday, February 07, 2011

ISM January: Much of the Same but More of It.

Worldwide Growth in Manufacturing
The US and much of the world's manufacturing base has maintained its growth this last month with many growing at a faster rate like the US. World-Wide Factory Activity, by Country is provided by the WSJ. Out of the list, only Greece and Australia are contracting. Last month Japan changed from contracting to expanding with the index jumping 3.1 to 51.4%. The top two with fastest growing manufacturing sectors was the UK and the US with 62 and 60.8% respectively. David Smith noted that the UK is also turning around the services sectors and should signify economic growth continuing although low at
Strong services completes January rebound.
More of the Good News
Most of the consensus data thought that the indexes would maintain approximately its last months pace, but in fact far exceeded it. Both indexes jumped a solid 2.3% with non-manufacturing rising to 59.4% and manufacturing to 60.8% which was the highest level since May 2004 or nearly 7 years. The non-manufacturing consensus from Econoday was 57% with an extremely wide consensus range of 53.4 to 63.5% and from MarketWatch it was 57.3%. Econoday reported a consensus of 57.5% with a consensus range of 56.5 to 59.5%. The ISM had revised its last month's data (seasonal adjustment according to non-manufacturing report) from 57 to 58.5% which is one reason that MarketWatch took the revised numbers to come up with a consensus of 58.5%. Either way, it still far exceeded expectations and reasons why many have given the reports glowing praise.

And beyond the headline numbers also deserved praise. Business activity/Production increased .5 to 63.5% for manufacturing and 1.7 to 64.6% for non-manufacturing. Not only is the heart of the economy is in production, going forward the indexes showed strength in new orders with non-manufacturing growing a solid 3.5 to 64.9% and manufacturing having an outstanding 5.8 increase to 67.8%. Also looking forward for the manufacturing sectors showed strength in new export orders with a huge jump of 7.5 to 62%. Most trade is on the manufacturing sectors, so the drop in the services sectors new exports of 2.5 to 53.5% is not as significant. The import index for manufacturing rose 4.5 to 55%. As I have stated before, it is important that the export sectors grow as this provides an autonomous increase in absorption for the economy that increases aggregate income. But the import index and export index are not necessarily correlated to total import and export aggregates and most importantly imports are the inputs to the production process and exports are the end process in production. Robert Oak provides a good analysis of the ISM manufacturing report at Manufacturing ISM for January 2011 - 60.8% where he states the following.
Exports & imports increased, exports up 7.5 percentage points, and imports 4.5. That's always good news when exports exceed imports, especially since the deceleration of imports was the reason we had reasonable Q4 GDP growth.

This portion I disagree with because the increased in percentage points is rate of change not absolute levels and the indexes ended up at 62% for new export orders and 55 for imports. Thus even if the difference in rates of growth were different, new export orders would have probably maintained its percentage lead. And secondly, imports and exports for the GDP is merely accounting for the GDP and are not the true strength of the economy.

Because of structural rigidity shown up in higher and rising prices for commodities, then this is no time to be worrying about imports to the productive sectors of the economy. It is nice to think that some of the shortages are solved by import substitution but in reality that is not likely to happen over the short term due to legal and economic structural rigidity. We should instead be embracing these imports as much as we embrace worker productivity.

Most importantly in the so-called Great Recession, we are concerned about employment. The employment index for manufacturing continued its nice accent to above 60 to 61.7% with an increase of 2.8%. Econoday notes that this is the first plus 60 for employment in 7 years. Although the index did not increase as much for non-manufacturing employment, it did an acceptable level of increase with a rise of 1.9 to 54.5%. Maybe this will signify a break out of the stagnant labor market that trended around the break even point of 50. But with employers adding only 36,000 jobs last month the US will need a lot more strength in employment markets to get back to full employment.

More of the old Structural Rigidity.
The manufacturing price index jumped up a massive 9 percentage points to an rating of 81.5% which is the highest the reading has been since July 2008. Even more striking is that firms reporting higher prices is 64% to just 1% reporting lower prices. While not as dramatic, non-manufacturing price index rose significantly at 2.6 to 72.1%. The December index was reported as 70 but was later seasonally adjusted down to 69.5%.

These data points have again re-emphasized the fact that Manufacturing continues to face higher prices of commodities. Multiple months of rising prices had 16 commodities which was marginally higher than the 15 last month but total commodities rising in prices rose to 30 from 23. Non-manufacturing also showed increased total number of commodities to 28 from 23 and even more significantly was 14 commodities with multiple months up from 7 last month. A couple of respondents in the manufacturing report stated the following about rising costs.
* "Continued weakness in the dollar is having a negative effect on the components we purchase overseas and increasing our material costs." (Transportation Equipment)
* "Lead times are increasing significantly, and commodity pricing is starting to increase." (Chemical Products)

The Myth that Never Dies
Manufacturing continues to roll right along but surprisingly many politicians and even some economists think that the US has lost its edge in manufacturing to China. For example, Don Boudreaux made a post entitled On Fletcher and the False Assumption of U.S. Manufacturing Decline, where he takes to task Ian Fletcher's remarks regarding manufacturing output in the US. Although, I am not so certain that it is unusual that democratic socialists like Harold Meyerson and Bernie Sanders would be anything other than anti-trade and clinging to the height of industrialization that led to expansion of unions.

Mark J. Perry states that The Demise of America’s Manufacturing Sector Has Been Greatly Exaggerated and that it was the Increased Worker Productivity {that} Has Destroyed Millions of Jobs and ultimately We Should Take More Pride in Our Manufacturing Dominance. I include two of the most important graphs that he uses to explain the reason not to fear the "post-industrial" economy. The first graph is manufacturing output for the top 8 producers. (Click on graphs for clearer images.)

The next graph shows the percentage of workers engaged in farming out of total workers. This happened over many generations, and many groups and individuals resisted this trend, but for us to become the developed nation we have become, it was necessary for this structural changes to have transpired. Even in the 1980s, there was weeping and gnashing of teeth with the decline in family farms. Regional credit crisis created some of the impetus for the changing economy.

Manufacturing Forecast: 58.5%
Non-Manufacturing Forecast: 57.3%

CARPE DIEM: Manufacturing Continues as Recovery's Shining Star

Calculated Risk: Daily Color: D-List Data

Misc. Links:
Calculated Risk: Chicago PMI Strong, Dallas Fed Index Weak

There's Hope: Online Job Demand Rises Above Pre-Recession Levels: Highest Since June 2007

CARPE DIEM: More on The U.S. Poor Getting Richer, And Being Envy of the World's Poor

Calculated Risk: Inflation in China

American Samoa: The real story 60 Minutes missed

Mish's Global Economic Trend Analysis: Bernanke Reports "Good News" on Inflation Targets; Treasury Selloff Continues on Strong ISM; 2-30 Yield Spread at Record


Econbrowser: An improving economic outlook

CARPE DIEM: The Amazing Gains in Worker Productivity = Record Output in Q4 2010 With 7 Million Fewer Workers



Calculated Risk: ISM Non-Manufacturing Index showed expansion in January


Don’t Stop That Growing Feeling «  Modeled Behavior

Monetary policy: Is QE2 working? | The Economist » Blog Archive » It’s That Damned “Holey” Tax System

Macro and Other Market Musings: Bernanke Acknowledges Risings Yields a Sign of Success

CARPE DIEM: Structural Shifts in the U.S. Labor Market

Labels: ,


Post a Comment

Links to this post:

Create a Link

<< Home