Manufacturing Bouncing Like a Dead Cat

The manufacturing segment of the economy has been especially dynamic of late and so demands review. We know that over the past few years, manufacturing, assisted by international demand and a mild recovery here at home, has helped support the economy. We also know that nascent demand decline caused by European recession (depression in some areas) and slowing in the China Asia Pacific region have caused a recent contraction in the American manufacturing segment. However, more recent data have shown a mild bounce. What we must determine from here is whether the sector will bounce robustly or more like a dead cat.

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Manufacturing Review

This week ushered in new global manufacturing data, offering information about the U.S., Europe and China. The data produced by Markit Economics showed the manufacturing sector in the U.S. expanded at a faster pace, China contracted at a slower pace and Europe contracted at a faster pace in October. On net, the news was improved, especially for America. The news very likely helped to lift the Dow Jones Industrial Average in early trading Wednesday, but by the close the SPDR Dow Jones Industrial Average ETF (NYSE: DIA) had succumbed to new pressure. The same was true for the Industrial Select Sector SPDR (NYSE: XLI). The catalyst for the turn downward was likely the Monetary Policy Statement of the Federal Open Market Committee (FOMC), through which it continued to intimate concern.

Region	PMI	Change
U.S.	51.3	+0.2
Europe	45.3	-0.8
China	49.1	+1.2

We knew Europe was getting worse when earlier this week the German Finance Ministry warned about an especially difficult fourth quarter for Germany. We noted that the German Chancellor was asking her countrymen to stand behind an economic stimulus plan that stood in complete perfect contrast to what the German led EU is asking of Greece. Markit Economics reported this week the Flash Germany Composite Output Index contracted a full point to 48.1, and the Flash Germany Manufacturing Output Index fell much further, dropping to 45.9. Each measure under 50.0 marks economic contraction, and so Germany is increasingly looking vulnerable to the contagion that is decimating its Southern brothers.

The improvement in China still marks contraction, and in a little less than two weeks, Mitt Romney might be a lot closer to labeling it a “currency manipulator.” While Romney is certain China’s dependence on the American end market will prevent a trade war, the market is probably not completely on board yet. Whether that happens or not won’t have any impact on soft European demand for Chinese made goods.

The American PMI data published by Markit Economics showed the New Orders Index declined to 51.6, from 52.3 in September. Now, that’s not a change that is necessarily worth getting up in arms about, but it may prove to be an early sign of a dead cat bounce in manufacturing. The last report published by the Institute of Supply Management showed a growing PMI, up 1.9 to 51.5, but that was for September. We’ll get October’s data on November 1st. ISM’s New Orders Index increased by 5.2 points on its way to 52.3 in September. Still, if this early data from Markit Economics holds true, the gains of September may not be long lived. At least one economist was skeptical of the ISM report the day it was published.

Anecdotal evidence or information from companies in the goods producing sector of the economy has mostly been contentious. Caterpillar (NYSE: CAT) revealed its concerns about the global economy in late September, sending its shares tumbling. The shares have fallen some more since reporting results at the start of this week and reducing its near-term forecast. General Electric (GE) finally made us look wise on our warning about it in June when it recently declined after reporting its third quarter. While GE met analysts on its third quarter EPS result, a trend of quarterly earnings outperformance ended. Also, analysts’ earnings estimates have been coming down almost without exception. The same is true for other industrials like Caterpillar, Cummins (NYSE: CMI), 3M (NYSE: MMM) and others. Though, there are segments of the sector where it is harder to find signs of trouble in earnings estimates, like in aerospace with Boeing (NYSE: BA) and in autos with Ford (NYSE: F).

In conclusion, it’s still too soon to say if this bounce will resemble that of a robust rubber ball or of a dead cat. However, as readers of this column know, I’m looking for the furry feline sort of fall. Today’s GDP data for Q3 showed better than expected growth of 2.0%, exceeding the economists’ consensus for 1.9% and Q2 growth of 1.3%. However, the GDP Price Index increased by a higher than expected 2.8% over the immediately preceding quarter. Though, the increase was mostly attributable to food and energy prices; but as you know, we think those prices matter to Americans as well. With an Iran event near certainly looming, Europe deteriorating, and tensions with China heightening, I see heavy weights against the sector. Finally, while I’m expecting the next employment report to appear positive on the headline unemployment rate, I continue to view the data misleading and incorrect. Thus, watch out for feline road kill on this segment highway.

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