An Analysis of American Manufacturing – Part 2

This article is a follow up to my article from last week where I discussed some data related to the US manufacturing sector. I came to the conclusion that much of the data indicated we are either already in a recession or soon will be. Today I would like to supplement that article with more data that has since been released from a few different sources.

First I will begin by looking at the Federal Reserve’s latest Industrial Production Index report that was released last week (February 17). I mentioned in my first article that one important aspect of this report to consider is the information pertaining to durable goods. This is because the thinking goes that individual consumers and companies will usually demand far fewer durable goods in  recessionary times because durable goods are categorized to have long lifetimes. So if money is short, people will tend to make what they already own work for them rather than rushing out to buy a new item instead. So this week I once again examine 12 specific durable good subindexes of the larger Industrial Production Index. The report indicated that 7 of the 12 subindexes contracted in the month of January, indicating that 7 of the durable good industries cutback on production. This in itself isn’t necessarily interesting though since these measures tend to bounce around up and down along a longer term trend. That longer trend is what I find of most interest. Applying the same logic as last week, I input this new data into my calculations of a moving linear slope for each index, and then I counted the number of subindexes with a negative linear slope. The result was that just 3 of the 12 subindexes indicated a negative linear slope. So from the month of December to January this measure remained unchanged. This would seem to be a happy sign.

Next I examine two alternative data sets released by an independent economics research firm, Markit Economics. Each month this firm release’s its own measure of manufacturing and service activities in various countries around the world. They obtain all of their data from their own proprietary survey data which provides us with a conveniently similar but different measure from what the US government publishes. Their Manufacturing Purchasing Mangers’ Index teeters above and below the indicating level of 50. A measurement above 50 indicates business conditions are good while the opposite indicates contraction in activity. Below is a graph of the Manufacturing PMI indicator going  back to the beginning of 2007:

markit pmi

Markit reported the index was at 51.0 in the month of February as the index continues its gradual decline that began back in the middle of 2014. While the index isn’t yet below the dreaded 50.0 mark, 51.0 is still a bad reading. This is especially true considering it is a pretty decent fall from 52.4 in January.  This fall might also suggest we may see further weakening in the aforementioned durable goods indexes when this month’s data is released. More importantly however, Markit notes that a measure of 51.0 is the lowest the index has been since September of 2009. It was also pointed out that most of this weakness is due to overall soft demand rather than other factors such as poor weather or other similar disruptions.

Moreover, Markit releases a similar measure of the level of activity in the services sector of our economy. This index was measured at 49.8 for the month of February which indicates a contraction in the service sector of our economy. I wanted to mention this measure because both the manufacturing and service indexes combine to create Markit’s Composite PMI Index. This February brought a measure of just 50.1 in this combined index. This is a concerning sign because the index is on track to fall below 50. Since 2007 this composite measure was only below 50 during the Great Recession and one month during 2013 when the federal government shutdown due to disagreements over raising the debt ceiling. This measure in 2013 should be considered an outlier though since that monthly decline was self-inflicted and was not indicative of a longer term trend change. Below is a graph of this composite index since the beginning of 2007:

markit composite pmi

Lastly I would like to look at the latest numbers concerning the value of manufacturers’ inventories and shipments of durable goods. Today the US Bureau of the Census released the latest numbers for January. We will take a long at the annual percentage change of each of this two measures. First I will present the graph for each below:

One thing that becomes obvious right away in both graphs is that the annual percentage change tends to go negative in times of recession. This would indicate the measures peak and decline in times of recession. So it is not hard to see that the data released for January continues to be consistent with the idea that inventory and shipment levels peaked and are now beginning to decline. Thus, this is a huge tell for the likelihood of a recession beginning this year.

I believe the data I shared today indicate a mostly negative outlook for US manufacturing and by extension the US economy. However, the various subindexes of the industrial production index don’t quite paint that picture yet. Even so, we find signs in other areas that things are not good. So despite the Fed’s insistence that everything is great, everything is not great. And on that note, I will point out that the Fed was absolutely positive about the US economy prior to everything falling apart in 2007 and 2008, so it is important to draw your own conclusions and prepare accordingly.

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