Dow Jones and Bloomberg enthusiastically reported the headline seasonally adjusted ISM Purchasing Managers Index December reading of 57. The Journal noted that it was the 6th straight month of readings above 55. Bloomberg blared that growth in manufacturing would propel the US economy in 2014. At 2:30 PM NY time, four and a half hours after the news was posted, stocks were down 18 on the SPX. Apparently the market’s New Year’s Eve Party coupled with Tuesday’s Treasury note settlement sucking $46 billion out of Dealer and investor accounts caused a bit of a hangover today. But don’t worry, the Fed is busy refilling the punchbowl. The drunk will revive.
The manufacturing sector accounts for around 11% of the US economy. Data for the much larger services sector will be reported on Monday. That index was very strong in September, but retrenched in October and November. That index normally moves in the same direction as the manufacturing indicator, but with much less volatility. It will be interesting to see if it rebounds to the extend that manufacturing has in the short run.
The actual unadjusted New Orders index component of the Manufacturing PMI is a good indicator of how the manufacturing sector is doing. This is the highest level in the unadjusted New Orders Index since December 2004. However, the ISM PMI is based on a survey of survivors in what has been a shrinking industry. The ISM merely surveys whoever is left each month and posted the results as a diffusion index of the survey participants. The index doesn’t reflect that there are fewer participants, who are also smaller in many cases. Neither the New Orders component or the overall PMI reflect the longer term trend of production.
The recent gain in this index makes the 2013 parabolic stock market blowoff look somewhat justified. But last week’s release of November durable goods orders, tells a different story. While the ISM index has been above or around 2005-06 levels, real durable goods orders remain well below those levels in spite of recent gains. The ISM data distorts the fact of just how weak the long term trend of manufacturing is. After nearly 5 years of recovery, manufacturing orders are still only at 2003 levels in real terms.
The direction of both stock prices and manufacturing has correlated with the size of the Fed’s balance sheet over time. That correlation has been direct in terms of direction, but the returns from the Fed’s money printing have collapsed. It now takes 5 times as much Fed cash to generate a unit of manufacturing production growth as it took in the 2003-2007 period. Meanwhile, driven by Fed cash pumped into Primary Dealer accounts, the stock market parties on, as it comes unhinged from the reality of slow economic growth. And that exacerbates economic inequality.
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