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They’re Manufacturing Data

There were two pieces of economic data released today. The ADP unemployment data is a prelim to the weekly unemployment claims, and is a bit of a so what. So are factory orders, but let’s take a look at it see to see if there’s any evidence of green shoots, or the latest term of art “stabilization.”

The chart below shows new factory orders, inventories, and the inventory to sales ratio, all not seasonally adjusted. I don’t like seasonally adjusted data. It’s just a way for the data provider to smooth out the numbers so that we can’t tell what’s really going on. There are better ways of looking at the raw data in order to discern whether the trend is improving or not.

Click to enlarge
Click to enlarge

The first thing to note is that orders were down, NOT up as the financial infomercial media (FIM) reported. This is par for the course. The seasonally adjusted data was up, and that’s what they report. The fact that orders were actually down is a minor detail that can be ignored. To be fair, they are always down in July, and this month they were down a hair less than usual, so to that extent I guess you could say that they were up. However, the trend still appears to be down.

Let’s apply a little technical analysis. I have overlaid 12 month moving averages on each of the data series. Lo and behold, the new orders graph has only come up to the 12 month moving average. It has not broken it. Economists may see a greens shoot or “stabilization.” To a technician, this looks like a dead cat bounce, with a resumption of the downtrend a distinct possibility.

Here’s another way of looking at it. On a year over year basis, new orders are down 21.8%. 6 months ago, they were down 22.8%. Adjusted for inflation, that’s no improvement at all. So much for the green thingy.

There’s also a little problem with the inventory/sales ratio, which has improved, but is still out of whack versus 2003 through the first half of 2008. In spite of production cuts that have brought inventories down by 10% over the past year, there’s still a lot further to go. Unless sales break this downtrend, a doubtful proposition, there will be more manufacturing cuts ahead.

What about the relationship of stock prices to new factory orders? Until 2006, they tended to move concurrently, yet another economic series that proves that stock prices do not and cannot discount the future because, people, by and large, have absolutely no clue what the future holds. In mid 2006, the stock market really took off into bubble territory, essentially running away from new factory orders on the upside.

When liquidity began to collapse in late 2007, the stock market having run itself upwards in psychotic delusion came down first, but when the real crunch hit in 2008, factory orders also fell apart. They both crashed together. Liquidity levels are always the prime mover of market and economic movements. Psychology plays a secondary, and intertwined role. Liquidity and psychology are two sides of the same coin. Got money in your pocket? You’re happy and want to spend. When you’re broke, you can spend so you feel lousy.

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In March Dr. Ben finally gave the depressed market and depressed economy a direct injection of massive quantities of intravenous money. The market and factory orders again turned up concurrently when the Fed began massive direct liquidity injections through permanent open market operations of historically unprecedented magnitude. Suddenly, all that money made people feel better. They bought stuff and got happy, happy, happy. V bottom!

I have chronicled the direct effects of Fed policy operations regularly in our Fed reports to subscribers for the past 6 years. When the Fed pumps the market jumps. And this time the Fed pumped like they never, ever pumped before.

In the end, it always comes back to the Fed. If those FOMCers are really thinking that the economy has stabilized and they start to cut back on the direct cash injections this fall as scheduled, they and the markets are in for a rude awakening. On the other hand, if they don’t cut back, we’re going to have another commodities bubble and cost pressures will again crush the economy. This time, the Fed may have made a mess that it can’t clean up.

Stay up to date with the machinations of the Fed, Treasury, and foreign central banks in the US market in the Fed Report in the Professional Edition, Money Liquidity, and Real Estate Package. Try it risk free for 30 days. Don’t miss another day. Get the research and analysis you need to understand these critical forces. Be prepared. Stay ahead of the herd. Click this link and get in RIGHT NOW!

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2 Comments

  1. eah

    Another good post. But the market has been ignoring this reality for months, and I am not at all sure it will stop, i.e. that the most recent ‘correction’ will continue. Mostly I still think it is better to be safe (nearly all in cash) and on the sidelines, rather than sorry.

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