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No Cliff Dive for Manufacturing

Jason Stipp

Jason Stipp: I'm Jason Stipp for Morningstar. A lot of market watchers recently have been worried about a slowdown in manufacturing. But we got some data this week that shows manufacturing might be holding up better than expected. Here with me to talk about those numbers and his outlook is Morningstar's Bob Johnson, Director of Economic Analysis.

Thanks for joining me, Bob.

Bob Johnson: Great to be here.

Stipp: So, manufacturing, and you've written about this recently, this isn't something that you've been as keenly focused on recently, why is that the manufacturing numbers have perhaps taken on a little bit less importance right now than maybe they had earlier on?

Johnson: Early on, you get this kind of big bounce back effect, manufacturing, when you go into a slump, just absolutely falls to pieces, down 20%, 30%, and then you hit bottom and it comes rapidly back and you have these stunning year-over-year growth rates that are really impressive. What happens is as the recovery matures, that easy bounce back money is gone and the growth rates, it look like 20, then 15, and then 10, and everybody is like, 'oh, the sky is falling. Look at how fast the growth is slowing.'

But frankly, over time, manufacturing has to grow at about the same rate as consumption grows. And they get out of whack once a while and you need some adjustments. So, we've had that adjustment phase in manufacturing, we've had some stellar growth. And now what you really need to sustain that growth is consumer spending, so we're much more focused on what the consumer is doing right now than what manufacturing is doing.

Stipp: Consumer taking on increasing importance. So, we did get some data this week that say, on manufacturing that didn't look too bad, in fact, it looked pretty good. Some of that data came from overseas in Europe, this is an area obviously a lot of people have been concerned about recently, but what are the manufacturing numbers saying about what's going on in Europe?

Johnson: Well, you know what, the numbers across the board were strong internationally. And I'm really pleased to see that. I mean, it was U.K., France, Germany, reported index is up over 50, which indicates growth and they accelerated from the prior month. So that's great to see, and everybody is worried Europe is falling apart, there is no hope for Europe, and yet we're seeing this accelerating manufacturing number out of Europe, and that's great, along with some pretty good sentiment numbers from consumers. So, here market analysts are all worried about what's happening in Europe, but the people in Europe are actually more bullish than they've been in some time.

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Stipp: So some interesting – potentially some interesting mixed signals there, but the data – the data, it looks pretty good on that front. So we also got some data in the U.S. for the ISM. What did that number look like and how do that compare to your expectation?

Johnson: Yes. I had expected a bit of a decline this month. We were at 50.69, and we went down to 50.66, and I thought the decline might be a little bit more than that based on some of the things I've been hearing, and the number held up amazingly well and a lot of it was because of supplier deliveries. The lead times it took to get stuff kind of stretched out, and that's one of the big things in kind of predicting what happens in manufacturing, and so that really weighed the numbers. So new orders were still a nice number, but down a little bit from the prior month. Production was actually down a fair amount from the prior month. So the headline number was wonderful driven by deliveries, but there were some underlying components that weren't great.

Stipp: So, Bob, given that you maybe aren't paying as keen attention on manufacturing, but we did still yet see some good numbers, do you think that this is going to hold up or if we see a little bit of a slippage in the next couple of months would that concern you?

Johnson: It really won't concern me, I wonder how fast it can kind of back off right now, because we've talked about Europe, we've talked about the U.S., China and Brazil also had some good numbers on the ISM front. I think, the fact that it's broad based and we're coming to the fourth quarter of the year and people are kind of beginning to gear up in some ways, I'm relatively optimistic that maybe we'll see better things ahead in manufacturing, but even if we didn't, I won't be scared. These are not the numbers I'm focusing on right now. They're nice to see. The market loves them, that's for sure, but I think that's kind of looking in the rear view mirror, I need the consumer right now.

Stipp: Sure. Lastly, we also got some construction data and this is an area obviously that's been hit pretty hard throughout the downturn, it's taken a long time to recover, what did the construction data say to you?

Johnson: Well, construction spending overall was up for the month of November or October, so that's a great number to see. That number has been in the doldrums, it's hurt GDP quite a bit every year for the last two or three years, and so now to see that number actually moving up, and that is – I bet some of that was on the public side of the house, but nevertheless I'm glad to see the construction has finally kind of hit a bottom and that we're not in this bottomless pit where the numbers is going to keep hurting GDP, so a good number there as well.

Stipp: Last question for you, Bob, given this data, what does that say about your thesis for where we might be with the fourth quarter and your economic outlook for the fourth quarter, does this sort of confirm what you were thinking, does it change any of your estimates at all?

Johnson: While, I think, the big thing I'll be looking to is the employment report coming up later in the week and figuring out where the consumer is at, that's what's really going to drive the fourth quarter number, you're not going to have the massive inventory or the private investment numbers drive it. It's going to take a good consumer number to do it, and it's all signs right now, the early signs on holiday shopping and Cyber Monday, and so forth are all very positive numbers. So I'm really looking forward to some better consumption numbers here going forward.

Stipp: So consumer is king, right now?

Johnson: Consumer is king, and I'm looking for 2.5%, 3% growth in the fourth quarter.

Stipp: All right, Bob. Well, thanks for your insights and for joining me today.

Johnson: Great to be here.

Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.