The August reports on manufacturing activity regionally, nationally and around the world generally indicate that manufacturing activity remains on the recovery side of the center line; albeit in some cases at the slowest pace in almost a year.
National PMI Report:
The Institute for Supply Management’s PMI for August rose slightly when compared to July; the August PMI registered 56.3%, an increase of 0.8% when compared to July’s reading of 55.5%. This reading surprised most analysts as the consensus view was calling for a significant drop into the 52-53% range. A reading above 50 percent indicates the manufacturing economy is generally in a period of expansion while a reading below 50 indicates a general contraction of the industry. The disparity between analyst forecasts and actual results serves as a bit of a reinforcement to the overall uncertainty in predicting the longer term performance of the manufacturing market sector.
Major Regional Reports:
The Philadelphia Federal Reserve Business Outlook Survey (regional snapshot of manufacturing within the Philadelphia, New Jersey and Delaware area) is released a week in advance of the National PMI. When the index is above 0 it indicates factory-sector growth, and when below 0 it indicates contraction. The survey index dropped to -7.7 in August; marking the first time the index has been in negative territory since July 2009.
The Chicago Purchasing Manager’s Index (PMI) hit 56.7% for August, the lowest mark for this index in 2010; the index was 62.3% in July. A PMI report reading of 50% marks the breakeven line between an expanding and contracting manufacturing sector. This report is released 1-day prior to the national PMI and has a historical 91% correlation with the national ISM; leading most analysts to predict similar trends in the National ISM as reported in the Chicago index; which wasn’t the case in August; once again reinforcing the uncertainty of the marketplace as a whole.
The Empire State Manufacturing Survey (covering New York) reported that new orders and shipment indexes both dipped below zero for the first time in more than a year, indicating that orders and shipments declined on balance; the unfilled orders index (backorders) was also negative and the six-month outlook also weakened. This report is issued at the beginning of the calendar month; and is an indication of future sentiment.
Major International Reports:
European Manufacturing slowed to the slowest rate of expansion in seven months with an index reading of 55.1; a reading above 50 percent indicates the manufacturing economy is generally in a period of expansion while a reading below 50 indicates a general contraction of the industry.
China was the lone exception among the major indices to show bigger growth as the China PMI rose to a three-month high of 51.9 in August from 49.4 in July.
The reports, when taken as a whole, indicate at best a continued slow recovery with caution, or at worst, that recovery could stall completely with a return to recession if the National PMI begins to mirror the regional reports.
Thomas Simons, economist at Jefferies & Co:
“The strength in this month’s (National PMI) report contrasts with the weakness in nearly every regional manufacturing survey, which makes it difficult to make inferences on the sector going forward…the data today is confusing” – (September 2010 in response to National PMI Report)
Tony Crescenzi, a portfolio manager at PIMCO: “The ISM index is somewhat difficult to reconcile against the regional manufacturing surveys as well as other recent data.” (September 2010)
Ian Shepherdson, economist with High Frequency Economics:
“We do not expect a double-dip recession, but we do think the ISM (manufacturing index) has further to fall; enjoy this while it lasts.”- (September 2010 in response to National PMI Report)
Zach Pandl, economist at Nomura Securities International Inc. in New York: “The report makes clear the economy is not slipping into recession any time but still reasonable to be concerned about where we’re heading over the next three to six months.” – (September 2010 in response to the National PMI Report)
Tom Porcelli, a senior economist at RBC Capital Markets Corp. in New York: “Manufacturing has completely passed its peak – the once-strong pillar of growth is starting to fade,” – (August 2010 in response to Chicago PMI)
Howard Archer, chief U.K. and European economist at IHS Global Insight: “…the August purchasing managers’ survey is nevertheless disappointing and reinforces suspicion that the first half of the year was as good as it gets for manufacturers” – (August 2010, in response to European Manufacturers Index)
Despite the positive national index news for August; there remains no overall consensus conversion to optimism amongst analysts; primarily due to the dramatically contradicting regional reports.
It is perceived that the national PMI is perhaps more reflective of large manufacturers while the regional reports provide a more accurate reflection of the small-to medium manufacturer.
The dichotomy of the indices is leading most to continue to view the market as “uncertain”, “unpredictable” and likely to stall in the short term unless the new order sub-indice steps up in the upcoming months.