Wednesday, October 6, 2010

Where Will Growth Come From? Part III; Manufacturing

Let's start with a look at where we've come from:

Overall industrial production has clearly rebounded, as has

Capacity utilization. However, note how far capacity dropped; this was the steepest loss of capacity in the last 50 years, indicating how severe the industrial contraction was.

The ISM number started to rebound in early 2009, and continued higher until earlier this year. The number has moved lower for the last few months; however it is still above 50 indicating an expansion. In addition, the number reached an incredibly high level, indicating there was nowhere to go but down. However, there are other signs of a manufacturing slowdown in the data.

Overall durable goods orders have been down three of the last five months. Also note that aside from two big gains, this series has been printing right around zero. However, it is important to remember that aircraft orders are part of this series, which tend to have a very disruptive effect on the numbers reported. However, regardless, the numbers are getting weaker and have been for the last few months. In addition, the regional Federal Reserve surveys are showing a slowdown.

The Empire State Index printed strong numbers earlier this year, but has since fallen back to just about 0. This is still an expansionary reading, but obviously not very strong.

The Philadelphia Manufacturing Index moved below 0 last month, but is currently right around that level.

The Richmond index is also moving lower, although still positive.

The Texas manufacturing index has been teetering just above 0 for the last year.

The Kansas City Fed's number printed a decent number last month.

The Chicago Fed's Midwest index is still increasing, although it is doing so from very low levels.

These numbers show that the Eastern Seaboard's manufacturing is slowing, but the mid-west's is fair and Texas' is borderline.

The overall slowdown in durable goods orders indicates the manufacturing sector is slowing. However, the overall ISM readings and numbers from the Midwest should be enough to keep manufacturing from contracting at a strong rate. I think these numbers indicate a level right around 0 is the worst case scenario going forward.