Manufacturing still firing on all cylinders
The February 2011 Manufacturing ISM Report On Business came out today confirming the strong manufacturing reading we got yesterday from the Chicago PMI. The National PMI came in at 61.4%, ahead of consensus expectations for 60.5% and up from 60.8%. These are good numbers. In fact, the numbers you want to see going up like new orders, production and employment are all up.
Moreover, the inventories picture suggests that there is still room for improvement in the numbers. Customer’s final inventories are to low. And manufacturing inventories generally are contracting. The only negative in this report was in prices paid, showing that commodity price inflation is having an effect. This will either show up in price hikes later in the year or in margin contraction in the manufacturing and retail sectors.
I am going to call a top here however. If you look back at the historical data, there have been no readings higher than this in nearly three decades. The last ISM number higher than 61.4% was a monster 69.9% reading from December 1983. So what does that mean going forward. In terms of growth of the manufacturing sector, it means that we are hitting maximum growth. I would expect the manufacturing sector to add less to overall GDP going forward.
Ed,
What do you think about the possibility of the 30 year secular decline of the US manufacturing sector coming to an end? Is it possible that productivity gains (ie. lower wages, technology) in tandem with the weak dollar are finally making up the difference in competitiveness between the US and EM?
This has been one of my long-term hypotheses, but I based it mostly on reactionary mercantilist government policies, a general collapse in China’s economy and primarily the “Hayekian” structure of production lengthening due to low rates, growing export markets and shifting time preferences. Those first two haven’t (yet) happened, but perhaps the hypothesis is coming to bear for the other reasons.
Thoughts?
Matt,
I think there is a strong possibility of that despite my calling a top in the ISM. What I would like to see is increased hiring and wage gains followed by further increases in the ISM. It’s not out of the realm of possibility. Since consumers are still stretched, I am expecting a pullback but there is plenty of evidence that US manufacturing is much more competitive today than at any time in the last two decades.
This is something that sounds so counter-intuitive to most that it almost seems inevitable. When I tell people that the US is still the world’s largest manufacturer, they don’t believe me. Is it really that crazy that the world’s biggest producer is able to recover from a brief pause in its multi-century growth?
My feeling is the recovery will by filled with dichotomy. The lowest order goods, like steelfab will remain a specialization of the EM, as will the highest order consumer goods (wal-mart, dollar store stuff). Both of those sectors are low margin and highly labour intensive. But the high margin intermediate goods like high-tech machine tools and efficiency devices will remain the specialization of the US and Germany. And this sector will see the greatest expansion in the next business cycle as the infrastructure deficit is closed and the EM factories mentioned above need modernization to achieve the same profit margins as their wages gradually rise.
If this hypothesis is correct, where would you look to invest? I’ve had EMR and PH on my watchlist for a while, but have foolishly avoided buying – thinking they’ll get cheaper in a cyclical contraction that refuses to arrive. Are there any ancillary industries that you think would hitch a ride in this environment?
Ed,
What do you think about the possibility of the 30 year secular decline of the US manufacturing sector coming to an end? Is it possible that productivity gains (ie. lower wages, technology) in tandem with the weak dollar are finally making up the difference in competitiveness between the US and EM?
This has been one of my long-term hypotheses, but I based it mostly on reactionary mercantilist government policies, a general collapse in China’s economy and primarily the “Hayekian” structure of production lengthening due to low rates, growing export markets and shifting time preferences. Those first two haven’t (yet) happened, but perhaps the hypothesis is coming to bear for the other reasons.
Thoughts?
Matt,
I think there is a strong possibility of that despite my calling a top in the ISM. What I would like to see is increased hiring and wage gains followed by further increases in the ISM. It’s not out of the realm of possibility. Since consumers are still stretched, I am expecting a pullback but there is plenty of evidence that US manufacturing is much more competitive today than at any time in the last two decades.
This is something that sounds so counter-intuitive to most that it almost seems inevitable. When I tell people that the US is still the world’s largest manufacturer, they don’t believe me. Is it really that crazy that the world’s biggest producer is able to recover from a brief pause in its multi-century growth?
My feeling is the recovery will by filled with dichotomy. The lowest order goods, like steelfab will remain a specialization of the EM, as will the highest order consumer goods (wal-mart, dollar store stuff). Both of those sectors are low margin and highly labour intensive. But the high margin intermediate goods like high-tech machine tools and efficiency devices will remain the specialization of the US and Germany. And this sector will see the greatest expansion in the next business cycle as the infrastructure deficit is closed and the EM factories mentioned above need modernization to achieve the same profit margins as their wages gradually rise.
If this hypothesis is correct, where would you look to invest? I’ve had EMR and PH on my watchlist for a while, but have foolishly avoided buying – thinking they’ll get cheaper in a cyclical contraction that refuses to arrive. Are there any ancillary industries that you think would hitch a ride in this environment?