Is Manufacturing Out of the Woods?

Last week, I noted that three regional Fed manufacturing surveys had printed lower numbers in their latest reading. As I described it, the breadth of the data was concerning. This week we have two more data points to analyze.

From the ISM:

"The recent trend of rapid growth in the manufacturing sector continued in April as the PMI registered above 60 percent for the fourth consecutive month. The New Orders and Production Indexes continue to drive the PMI, as they have both exceeded 60 percent for five consecutive months. Manufacturing employment appears to have developed significant momentum, as the Employment Index readings for the first four months of 2011 are the highest readings in the last 38 years. Inventory growth also took place in April after two months of destocking; however, the inventory restocking would appear to be necessitated by the strong performance in new orders. While the manufacturing sector is definitely performing above most expectations so far in 2011, manufacturers are experiencing significant cost pressures from commodities and other inputs."

While this data point is lower than the preceding months, the reading is still very good alleviates some of my concern. 17 of the 18 industries reporting were showing growth, with the only laggard being furniture.

Here is what respondents said:

• "Rapidly rising raw material costs putting extreme pressure on profits." (Food, Beverage & Tobacco Products)
• "Plastic resin product prices are climbing so fast that [suppliers] are attempting to increase prices on orders already accepted but not [yet] delivered." (Chemical Products)
• "Customers are rebuilding safety stock levels of inventory, and also trying to buy ahead of material price increases." (Plastics & Rubber Products)
• "Market continues to get stronger month over month. Recovery is faster than anticipated." (Transportation Equipment)
• "Pressure from offshore suppliers continues to mount with exchange rate increases and seasonal demand for capacity." (Miscellaneous Manufacturing)

One interesting point is that people and firms appear to be stocking up on supplies in anticipation of further price increases. That tells us that some of the current activity is probably speculative in nature. It also means manufacturers are probably getting squeezed by the increases and are looking to pass on some of those increases in higher prices if possible.

However, the overall report is still very strong and indicates manufacturing appears to be in good shape.

Factory orders also printed a strong number:

U.S. factory orders surged in March, posting a fifth straight monthly increase that showed a healthy manufacturing sector well placed to support economic recovery.

The Commerce Department said on Tuesday new orders for manufactured goods rose 3 percent to a seasonally adjusted $463 billion, well above Wall Street economists' forecasts for a 1.9 percent pickup.

In addition, February orders that had been reported as dropping by 0.1 percent were sharply revised to instead show a 0.7 percent increase.

A cheaper U.S. dollar has helped export industries and there are signs that producers are boosting investment in plants and equipment to benefit from it.

Orders for costly durable goods, items designed to last three years or more, were up 2.9 percent in March, the department said, an upward revision from a 2.5 percent gain it had earlier reported.

Financial markets showed no response to the data.

Orders for nondefense capital goods excluding aircraft -- often taken as an indicator of businesses' future investment plans -- were revised to show a 4.1 percent rise in March instead of a 3.7 percent gain. That followed a 0.9 percent increase in February.

The above reports help to alleviate my concern as they add more evidence to the argument that recent weakness is simply a blip.