Tuesday, July 24, 2012

Where We Are; Manufacturing

From Ben's latest speech:
After posting strong gains over the second half of 2011 and into the first quarter of 2012, manufacturing production has slowed in recent months. Similarly, the rise in real business spending on equipment and software appears to have decelerated from the double-digit pace seen over the second half of 2011 to a more moderate rate of growth over the first part of this year. Forward-looking indicators of investment demand--such as surveys of business conditions and capital spending plans--suggest further weakness ahead. In part, slowing growth in production and capital investment appears to reflect economic stresses in Europe, which, together with some cooling in the economies of other trading partners, is restraining the demand for U.S. exports.
From the Beige Book:
Manufacturing continued to expand in June and early July in most Districts, but at a more modest pace compared with earlier in the year. Several Districts reported that new orders had moderated since the last report, but the Philadelphia, St. Louis, and Kansas City Districts were more optimistic that new orders would rebound. The Philadelphia and Richmond Districts however, reported declines in shipments and orders. The passing of a transportation bill through Congress led contacts in the Philadelphia District to express interest in increasing their capital spending. Capacity utilization rates at refineries and petrochemical manufacturing facilities held steady in the San Francisco District, with weaker domestic demand being offset by growing exports. Meanwhile, manufacturers in the Dallas District reported operating at above 90 percent utilization rates to catch up with below-normal inventory levels

First, note that in Ben's testimony, he places the blame for the slowdown in US manufacturing on the EU and developing market situation.  This is a very important point, and one that we have stressed on this blog for the last six months, especially as we have seen the BRIC countries experience a big slowdown in growth, albeit for various reasons.

Lets start with a macro view of the manufacturing sector:

The ISM manufacturing index had readings above 50 for a little over a year.  However, it's latest reading showed a contraction with a reading of just below 50. 

More importantly, the new orders index dropped sharply in its last reading.

 The above chart compares the ISM reading (blue) with the ISM new orders number (red).  Notice the tight correlation, along with the fact that new orders typically lead the overall ISM reading.

The durable goods orders numbers show an overall stagnation with a slight downward trend over the last 7 months.

The top chart shows overall industrial production.  While it has moved upward slightly over the last five months, that rate of increase has definitely slowed.  More important, the capacity utilization number below indicates that the rate of industrial expansion has slowed, confirming the slowing trend in the IP numbers.

The above macro numbers indicate that the overall manufacturing sector is stalling, most likely as a result of the slowdown in the EU and developing markets.