Technical indicators and screening measures were positive again Thursday while the market averages treaded water. There are lots of technical positives, but also some...
Read More »
Don’t believe the hype about a return of US manufacturing
New factory orders, a broader measure than durable goods orders because it includes non-durables, increased in September but remained down versus the corresponding period last year. Total new factory orders were down 1.7% year over year. That was better than the August year to year decline of 4.3% which was the worst performance since November 2009. The growth rate has been in a downtrend since April of 2010. I report this measure as adjusted for inflation and not seasonally manipulated in order to give as close a representation as possible of the actual unit volume of orders and thus the actual trend.
The month to month change was a gain of 1.9%. September is a swing month with no discernible seasonal pattern, sometimes up from August and sometimes down. September 2011 saw a decline o 0.9% while September 2010 was up by 4.3%. The average September change during the previous 10 years was a gain of 1%. There was nothing out of the ordinary in this year’s number. While there was a small decline since last year, the trend has been essentially flat since 2011 at roughly 9-10% below the peak levels of 2007-08.
Don’t believe the hype about a return of US manufacturing. Clearly, it “ain’t” happening. But the ISM new manufacturing orders index for October suggests that another gain is coming in the factory orders data for October when it’s released in early December. Another cyclical upturn may be under way. The peak level for the year is typically in March. The low for the year is usually in January or February. If this is a renewal of the uptrend, then this index would need to stay above the recent lows and then break out to a new high in March. Otherwise, there’s still no US manufacturing recovery, contrary to all the ballyhoo.
The manufacturing data has tended to trend with stock prices, with both clearly reacting to Fed quantitative easing or tightening. In 2008 there was a late burst of manufacturing activity after the Fed had begun to withdraw liquidity from the financial market.
At that time, the Fed shrank the System Open Market Account (SOMA) which is the account which holds the Fed’s securities, and the account from which it conducts its trades with the Primary Dealers in conducting open market operations (OMO). It did that in order to fund and conduct emergency lending operations to the banking and shadow banking systems, cutting out the usual direct funding of the Primary Dealers. This is what the Fed called “sterilization.” It funded its new emergency lending programs by defunding the SOMA in order to keep the size of its balance sheet from growing, in theory to prevent any inflationary effects.
The Fed’s draining funds from the Primary Dealers in this way caused the 2008 stock market crash, but because the Fed was flooding the banking and shadow banking systems with liquidity directly, manufacturing held up for a while. Manufacturing activity finally succumbed when the Treasury crowded out the rest of the market in 2008 when the US Government raised $800 billion in a short period of time in September-October 2008 for stimulus and TARP.
That won’t happen again. The manufacturing data should correlate better with stock prices when this market does top out. I expect both to follow the Fed when it finally stops QE.
For more charts and discussion on this topic visit the permanent ISM New Orders and Factory Orders page from which this report is excerpted. That page is updated whenever new data becomes available. You can bookmark it for future reference.
Stay up to date with the machinations of the Fed, Treasury, Primary Dealers and foreign central banks in the US market, along with regular updates of the US housing 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 begin your risk free trial NOW!
See also Why Seasonal Adjustment Sucks