Look, Manufacturing fell off a cliff after being in decline for years and years in this country. An index value of 50 indicates that the fall stopped, at least for now, and anything over 50 means that some growth is occurring over the last reporting period, and that’s what this report says. But it’s misleading for what it doesn’t say, and that’s that manufacturing is at such a low level that even cash for clunkers is enough to bump it up for a short time period. But cash for clunkers is now over. Is our manufacturing economy really now growing, and is a 50%+ market rally really pricing in reality?
The ISM's manufacturing index burst over the dead-even 50 level for the first time since the beginning of the recession, at 52.9 in August vs. 48.9 in July. New orders led the advance, at 64.9 vs. August's 55.3 and pointing to rising business activity in the months ahead. Production was also very strong in August, at 61.9 for a 4 point gain and pointing to gains in durable goods shipments and total manufacturing sales. Backlogs also increased, at 52.5 vs. 50.0 in July. But manufacturers are not stocking up, instead they continue to draw down inventories where the index is a very weak 34.4 vs. 33.5 in July. Note that future gains in the inventories index, a seeming necessity given rising production needs, will help give the overall index a big boost. Respondents in fact think inventories at their customers' firms are too low, with the customer inventories down 3.5 points to 39.0. Deliveries slowed substantially, up more than 5 points to indicate that current production needs are stressing what has become a pared down supply chain. Production activity and the gain in orders has yet to boost employment where the index only inched forward to a still sub-50 level of 46.4.
All the strength here is flowing through to prices where the prices paid index jumped 10 points to 65.0, an indication that buyers are bidding up prices for raw materials. No doubt boosted by cash-for-clunkers and gains in transportation, the manufacturing recovery is on the way and together with the gain in the pending home sales index indicate that two key sectors are on the acceleration. Stocks jumped in immediate reaction to today's 10 o'clock data.
Wow, look at that chart! Heck, we’re right back where we were, right??? This is how misleading these indexes are… they do not reflect reality as they do not show you what is happening to the base.
Compare the chart above to this chart of manufacturing sector output which is also an index value, but one that’s tied to the manufacturing level in the year 1992:
Or to this chart showing manufacturing sector output expressed in yoy percent change:
You see, the charts above are indexed to a base year, but the ISM index number is based to nothing but the period preceding it. Now, which charts more closely show reality???
There is no doubt that the above charts of manufacturing output paint a far truer picture of what’s occurring because the index value has no connection to the base, it’s just plus or minus over time! So, for real meaningful growth to occur, the ISM must be above 50 and stay there for an extended time.
To confirm that hypothesis, one need only look at the shipping indexes which are simply still scary.
We can also look at the number of people employed in manufacturing durable goods, for example, and when we do we find that the United States currently employs about the same number of people for manufacturing as we did back in 1947! Now, you say that’s because we are way more efficient and productive? But remember that it requires people to earn money to buy things. It takes INCOME to service DEBT. The service sector has been growing while the manufacturing sector has been shrinking. Service sector jobs do not pay, on average, as much as manufacturing sector jobs. Yet DEBT had been skyrocketing until just recently. It takes INCOME to service DEBT.
We can also look at durable goods ORDERS and this is expressed in millions of dollars. Here you can see the cliff dive and the recent turn upwards:
So, you must ask yourself if the market is actually pricing in the future, 50%+ priced in already, or is it actually just disconnected from reality?
You know what they say about statistics…
Inner Circle – Games People Play: