Manufacturing Index – Continued Growth!
Dr. Chris Kuehl, Economic Analyst and founder of Armada Corporate Intelligence
There has been a lot going on as far as the economy and manufacturing index trends are concerned. Not that there is ever a time when everything is predictable and calm, but this year has been more volatile than usual – especially of late. We had the big tax cuts at the start of the year, and we are still waiting for the projected impact. We have seen the return of stock market volatility in part due to the tax changes, as there is now a real concern regarding an outbreak of inflation and the Fed’s subsequent reaction. Now we have steel and aluminum tariffs, but still don’t quite know who will and who will not be affected. The consumer should have reacted strongly to the tax cuts, but they seem to be waiting for those wage hikes they were told to expect.
This month manufacturing index readings split neatly down the middle, with six trending in a positive direction and six trending in a negative direction. Some of the manufacturing index movement was slight but significant nonetheless. Among the stronger growth manufacturing index indicators was the “new automobile and light truck sales” as they came back after a major decline.
The good news is that there has been a recovery; the bad news is that the pace of selling has been off from what it was through the year. The better news was found in the “new home starts” data, as there was a really appreciable surge taking these readings back to what they were through most of the year. “Steel consumption” went up slightly, but this is likely to be the calm before the storm as the drama of the steel tariff discussion had not occurred yet. The expectation is that consumption will rise sharply in the short term as buyers try to beat the price hikes, but by the summer months expect a decline in consumption.
“Durable goods shipments” were generally up and so were “appliance orders” (but just barely). This was in contrast with the decline in factory orders. The surge as far as durables was concerned is attributed to industrial machinery activity. There is a lot of anticipatory buying of late (although this slowed a bit this month). The interest in technology and robotics continues to expand, and that added to these positive durable goods numbers. There was also positive movement as far as the Credit Managers’ Index (CMI) was concerned. This also marked the second month in a row for CMI growth, and these days that qualifies as a trend.
The negatives are not trending in an awful direction, but there are concerns. The slip in “industrial capacity utilization” is not huge, but there had been hope that it would keep trending in a generally positive direction and get close to the ideal level between 80% and 85%. The fact that capacity numbers went down is related to the big drop in “capital expenditure” that always seems to take place at the end of the year. Those tax breaks start to expire, and companies make the decision to purchase whether they need to or not. They hope the added capacity will be needed at some point, but in the meantime they have too much. The “prices of metals” slipped a little this month as well, but that is also likely to be temporary. The demand for aluminum is still high and the U.S. is just starting to understand that it is going to be dependent on other nations regardless of the tariff – the U.S. doesn’t have its own bauxite.
The “PMI New Orders” manufacturing index fell a little, but it is coming off a lofty position held last month. The fact that the numbers are in the mid-60s is the important point as anything over 50 is a strong signal of expansion. The overall Credit Managers Index is also as high as it has been in years, even with a small dip this month. The slip in “factory orders” was a bit confusing given the rise in durable goods activity, but the downward shift is likely due to consumers who are still not motivated to spend as aggressively as expected.
The tax cut boost was nice, but wages are languishing. The “transportation index” has remained high but slipped a bit. The transportation issue is capacity, and there is not enough to meet current demand – not enough drivers and not enough trucks and trailers. Yields are up simply because shippers have to pay what the trucking companies demand.