The report was issued today by Norbert J. Ore, C.P.M., chair of the Institute for Supply Management™ Manufacturing Business Survey Committee. "January marked 12 months of contraction in the manufacturing sector. However, the rate of decline as measured by the PMI was slower than experienced in December. The January New Orders Index is at 33.2 percent, up from the seasonally adjusted 23.1 percent recorded in December. While this is a significant month-over-month improvement, it is still a sign of continuing weakness in the sector. Comments from our respondents indicate that it will take a recovery in automobiles and housing for the manufacturing sector to once again prosper. On a positive note, the Prices Index continues to indicate significant deflation in the prices that manufacturers have to pay for their inputs, and this should ultimately be good for the consumer."
There are several key points in the preceding paragraph:
1.) The index has shown a decline for 12 months. This is not a temporary slowdown caused by a market hiccup; it is a serious downward move that shows a fundamental weakness in the economy.
2.) Housing and autos must recover in order for manufacturing to recover. I've been harping on housing for, well, forever. The bottom line is so long as we are seeing home prices drop at fast year over year levels we aren't anywhere near a bottom in housing. And considering this chart:
Click for a larger image
We're nowhere near a bottom. When we see the y/o/y price declines slow -- that is, we see the y/o/y declines in the 3% - 5% range then we'll know that a bottom is approaching. But we're not there yet.
As for autos, consider the following chart from the BEA:
This chart shows the percentage change in real consumer spending on durable goods for the last 8 quarters. It has consistently moved lower. That means people are really pulling back on spending in a big way. Add to that an increasing savings rate and you have real problems for the US auto sector.
