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VIDEOImportant Manufacturing Indicators Look Weak
Recently released data indicate prolonged economic weakness and a continuing decline in factory orders and the build-up of inventories.
There are a lot of indicators that have been published recently that show continuing weakness in the economy, which will lead to declines in output. The key indicators to me are the decline in factory orders and the build-up of inventories. I expect this trend to continue.
The important indicators are:
ISM Manufacturing Index
Here is the money comment (Emphasis, mine):
Lagging factors gave what is a bit of a deceptive boost to the ISM's manufacturing index masking a further slowing in the key leading index of new orders. The PMI came in at a stronger-than-expected 56.3 for a sizable eight-tenths gain from July. The reading is well over 50 to signal month-to-month growth and in the comparison with July, to signal growth at an accelerating rate. But this growth is in general business activity: production, employment, inventories. These three factors all accelerated in August with a special note on inventories where the gain may reflect in part an unwanted build.
New orders slowed but just a bit, down four tenths to 53.1 for its lowest reading since the manufacturing recovery began in the second quarter of last year. Unfilled orders also slowed, down three points to 51.5 and its weakest reading since December. The slowing in order build is certain to limit future improvement in business activity.
Source: Wall Street Journal
What hasn't been encouraging is the slowdown at the wholesale level as June inventories rose 0.1%:
Source: Wall Street Journal
We'll have to wait until the week of the13th (when the wholesale inventory numbers for July come out) to see if this trend is continuing.
Factory Orders
Yesterday's increase in the ISM's manufacturing composite for August, which gave a big lift to the stock market, masked cracks in order data. Similar cracks appear in today's factory order data for July. New orders edged only 0.1% higher following a 0.6% decline in June (revised from minus 1.2%) and an unrevised 1.8% decline in May. The data are being skewed slightly lower by non-durables, a group exposed to swings in commodity prices. Yet the durables sector isn't all that hot either, showing a 0.4% gain in July (revised from plus 0.3%) following a small decline in June and a not-so-small 0.7% decline in May.
Unfilled orders also show weakness, down 0.1% for durable goods in July following fractional gains the prior two months. With slowing rates of orders coming in and backlogs being worked down, the outlook for shipments is no longer so good. Shipments did jump 1.1% in July but a significant degree of this, due to lead times, reflects the filling of prior orders. On inventories, [Wednesday's] ISM data offer hints that a significant build is underway, one that may prove to be unwanted should orders fail to pick up. Inventories jumped 1.0% in today's data.
Other readings are also less than positive. Capital goods data show strength in shipments, tied here definitely to the group's long lead-times, but show significant and surprising weakness in orders. The factory sector remains at the crossroads, having led the economy out of recession but now showing an aging slope.
Source: Wall Street Journal
The market's been going gaga over these numbers, don't ask me why (ask DoctorX). On one side of the world, Europe's indices are weak. On the other side, China is flat, but Taiwan and South Korea are down. The market reacted very positively to the fact that China's version of an ISM report was up 0.5% (to 51.7 from 51.2). I don't see it myself. As fiscal stimulus is wearing off, and as the housing bubble is starting to burst, I wouldn't expect much growth out of China. Did the bulls check the consumer data in Europe and here?
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