ISM manufacturing survey points to more inventory gains
You can be bearish and point to the potential for a double dip all you want (I certainly do). But to dismiss out of hand the huge uptick in manufacturing is just crazy. These numbers are off the charts bullish.
Witness the latest manufacturing data from the ISM below:
The PMI is at 58.4, last seen in August 2004. New orders and production are well over 60. Even employment is increasing in the manufacturing sector. This is extremely bullish.
I should also point out the areas highlighted in green – inventories. Inventories are still dropping and are way too low. The norm for any business cycle is for firms to first reduce inventories less slowly – which is where we are. And afterwards, they actually increase inventories, further adding to GDP. You’ve got guys like David Rosenberg poo-pooing these numbers and the huge 5.7% Q4 GDP print looking for a weak Q1 2010.
But consider that never before have we seen a 5.7% GDP growth rate in a quarter when the aggregate workweek was cut by 0.5%. There is no way that productivity is running as high as the data suggest. Either the hours worked and employment data are wonky (though the jobless claims data are still consistent with moderate job loss) or the GDP data are wonky, or maybe they both are.
Here is another way to assess the data: We saw history in the making — an eye-popping 5.7% GDP growth rate the exact same quarter that the unemployment rate rose 40 basis points, to 10%. It is like Houdini’s rabbit! This has never happened before.
Really? C’mon. I’m sorry but there is zero caveat to these numbers whatsoever. I don’t care what the workweek is doing. Perhaps Rosenberg is saying the numbers are as fake as the Greek numbers. I don’t know. But, for me, this is a cyclical recovery. As I said in November:
from my perspective, it is inventories which are the most bullish data points. The inventories data show that inventories in the manufacturing sector were still being purged in October even while production is increasing. That means that inventories are likely to make a huge contribution to GDP going forward in Q1 and Q2 of 2010. GDP could again surprise to the upside.
The same is true again here. I see upside to Q1 rather than downside here. As I have stressed in the past, cyclical agents are now at work in a way that is self-reinforcing. The only thing standing in our way is the mountains of private sector debt, calamity in property markets and the spectre of local government retrenchment.
As I see it, these are the agents to worry about for a double dip. Otherwise the data from the manufacturing sector is looking mighty good. Please tell me I’m wrong.
Service sector rules the U.S. economy these days. Manufacturing is important, but won’t have a sustained recovery until consumer demand recovers, and consumer demand won’t recover until the service sector recovers. After the inventory buildup, the stage will be set for the double dip…
decidedly not wrong. this is the most powerful inventory correction cycle in memory, mostly because production went full-stop in 4q2008 and there’s a lot of catching up to do. manufacturing output was down over 20% YoY at one point, and is still likely down more than 10% from peak. so there’s been room to increase.
but now real retail and food service sales are down about 10% from peak too, so manufacturing is falling into (approximate) balance with sales again. the IS ratio is almost back to precrisis levels – but if real sales don’t start increasing, i think we’re probably nearer the end of the inventory cycle than the beginning. and that will be a big GDP problem by 2h2010 to go along with stimulus runoff and liquidity withdrawal (if we really have the guts).
The inventory cycle is huge. It DID add 3.5% to GDP in Q4. We can’t expect that to suddenly reverse for no reason whatsoever. That doesn’t make sense. More likely, the inventory effect will dwindle with time. My baseline is that it will dwindle significantly by H2 2010 and that’s when the underlying weakness of the economy will hit home AND when stock prices will react if they have not done so already.
PIMCO’s Mohamed El-Erian’s recent comments are of the same ilk.
In my view, the only question is whether this systemically anemic growth in consumption will induce a double dip. And based on what I saw regarding consumption growth slacking off in 2005, a full year before income growth, I expect to see changes in consumption first as the economic canary in the coalmine.