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Mixed Signals on Manufacturing

Jason Stipp
Robert Johnson, CFA

Note: Due to travels, Bob Johnson will not have a regular column this week. As a replacement, we filmed his take on some of this week's indicators on Wednesday, and you can get Bob's perspective on Friday's government employment here.

[recorded Wednesday, Sept. 4]

Jason Stipp: I'm Jason Stipp for Morningstar.

Bob Johnson, our director of economic analysis, will be out of the office later this week, but he is giving us an early peek at some of this week's data for his regular readers on Saturday. He is here to give his insights.

Thanks for joining me, Bob.

Bob Johnson: Great to be here.

Stipp: Let's run through some of the data we got this week already. Let's start with ISM manufacturing data, which showed a nice increase.

Johnson: Manufacturing isn't a key driver of the economy here in the U.S., but it's good to see the data up, and we're at 55.7, which is up from something in the 54 range the month before. It's certainly a nice improvement in the PMI data, and the manufacturing economy seems to be doing pretty well. The new orders portion of that index was up at 63, which was a big jump and, in fact, drove almost the entire amount of the improvement in the data.

Stipp: But when you look at this data and you look at another set of data, something is not quite adding up here.

Johnson: I look at industrial production and durable goods orders, which should have some correlation with the ISM data. And darn it if the industrial production data for manufacturing and durable goods orders have just frankly been soft and lackluster, while the ISM data seems to be saying we're having a great economy.

I don't know what's happening--[maybe] the ISM is just such a leading indicator that we're going to see it turn up in the other datasets eventually, or if maybe the ISM data, which is a little bit more, "is it up, is it down, or is it the same?" It's not hard numbers. I'm wondering if [ISM data] is getting a little bit more like a sentiment indicator, where the purchasing managers that are filling out the forms aren't necessarily going back in the backroom and checking out each order and trying to formulate an answer, but [instead they are responding] more like, "I think it feels kind of good this week."

Stipp: So there is a little more subjectivity in how the ISM data gets aggregated, but the durable goods, which is more hard data, isn't quite as good as you would expect given what you are seeing in ISM.

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Johnson: Exactly. Neither dataset says we're falling apart. The ISM data might [suggest] we're kind of getting near a very exciting part of the manufacturing curve, and I just don't see it.

Stipp: … We [can] look at the manufacturing data and it's interesting, but it's not necessarily what's really driving the economy. When you look at the consumer data, people have to be buying what they're manufacturing in order to see manufacturing continue on a positive trend. So when you look at consumer and some of the data we got this week, what are you seeing there?

Johnson: As we said last week, … the consumption growth rate has really been slowing for a number of months here. It's nothing terribly worrisome. It's not like it's falling apart. But we've gone from kind of mid-2%s to something right around 2%, maybe just under a touch.

Stipp: This is the shopping center data?

Johnson: No, this was last week in the consumption report that came out last Friday.

Then this week, we got more soft data on consumption, at least the retail stores part of it, with the data from the National Council of Shopping Centers, which showed year-over-year growth of just 1.8% on a single point basis. That's a little bit weak, and we like to see that number in the 2.5% to 4% range. The moving average has moved back down yet again, and we're still slightly above 2%. But consumers are not wildly spending money. Everybody seems to be quite optimistic, but it isn't turning up at the store registers.

Stipp: So consumers aren't wildly spending money at retail stores, but another piece of data is Ford auto sales, and that shows consumers might be spending money, just not in retail stores. They might be buying new cars.

Johnson: Yes, and that's a very interesting point. We've got some of the auto data so far today [Wednesday]. There will be more later in the day. But certainly some of the news out of Chrysler and Ford looked very good. I think it's the best data in Ford's case since 2006 or 2007 in terms of sales, and some hints that it could have been even better if they had enough of the right kind of cars.

So, certainly the auto industry seems to be picking up steam. I don't know whether we'll get to the full 16 million that some people thought we might get to in terms of a monthly production rate. But it seems to be the auto industry is picking up steam. And that always takes a little bit away from some of the other categories. So maybe that's a little bit of what's going on.

But it's good to see. The consumption trend has generally not been so good, but to see that the auto sales, which do require a fair amount of consumer confidence, are doing very nicely certainly reassures me that, if anything, this is a soft patch, and not a falling into the hole again.

Stipp: If we saw retail going down and auto sales also soft, I think there would be a much bigger reason to worry.

Let's talk about non-residential construction data. We also got some of that this week, and it looked a little bit better in July than it had looked before.

Johnson: Some of the other [prior] months were revised up a little bit, too, which was good news. Overall, the number was up about 0.6%. And this spring that got to be a bit of a problem. While the housing sales were booming, the construction for businesses was very soft, and it was quite a detractor in one period in the recent past. Now we've improved from that, and it was nice to see in July that we continued a slow amount up. So that was certainly good news.

Stipp: Let's talk about the CoreLogic housing price data that we got. There have been worries that we were seeing, not softening in housing prices, but the acceleration was coming down a little bit. But the CoreLogic data shows that we're still seeing a good trend of price acceleration.

Johnson: Their numbers look pretty darn good, both the data for July and August. Recall that most [agencies] will be releasing July pricing data, but because [CoreLogic] looks at pending data, they can also give us some hints about August. But those seem to be 12% year-over-year growth again.

This all seems to be well in terms of pricing, although the bad news is that inventories are probably still very tight and people aren't putting their homes on the market, and it means that probably not a lot of new homes are constructed. So that's unfortunately the bad news part of that really good pricing data.

Stipp: Good news and bad news there.

Let's end this discussion with a little bit on trade. The trade deficit bounced higher, but you have to look at the longer-term trend to really get a grasp on what's going on there.

Johnson: And this month's data by itself didn't look wonderful. The trade deficit went up from $34 billion to almost $40 billion, so it went the wrong way. That's usually a negative for GDP. But, again, given the big yo-yo that this has been on, I really wasn't terribly worried by the number.

Exports were off just a little bit in July and imports were up a fair amount, again indicating the world economy was still a little slow, with the U.S. economy doing a little better than everybody else. That's really about all you can glean from the data. I don't think trade will be much of a hurdle or a help to the GDP number for the entire overall third quarter.

The numbers show that things are better, and certainly we had hit some kind of air pocket in April, and in May we turned the corner a little bit, and at least we're not getting any worse. But there is no boom here, either.

And let me just summarize: Overall, the data this week was relatively positive. And the market reacted, actually, relatively positively to it. I think they've all baked in that the taper is going to start anyway, so they were pleased to see manufacturing, construction, autos, all looked better. Frankly, it's been a while since we've had a bunch of data that all is pointing to things looking a little better instead of, this one's good, this one's bad. So, overall, I think the data was positive this week, and I think the markets have reacted positively to the data for a change.

Stipp: Of course we'll have to look at jobs data on Friday.

Johnson: That's the big kahuna. What we've seen so far is really just the warm-up.

Stipp: All right. We'll cover that separately, but thanks for joining us and for your insights today, Bob.

Johnson: Thank you.

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