US Videos

Don't Misread the Manufacturing Data

Jason Stipp
Robert Johnson, CFA

Jason Stipp: I'm Jason Stipp for Morningstar. Manufacturing is about 12% of the U.S. economy, but it often gets a lot more attention than that 12% might imply. Here to talk about what manufacturing data can tell us and are telling us is Bob Johnson, our director of economic analysis. Thanks for joining me, Bob.

Bob Johnson: Great to be here today.

Stipp: You said manufacturing data often gets a lot of attention, maybe more than you might expect for the component that it is of the economy. Why is that?

Johnson: There are a bunch of different reasons. One is it's very easy to count. It's kind of hard to figure out some things, but the manufacturing sector is really easy to count. People love to count things. There are a lot of regional surveys, and the data on manufacturing goes back further than just about any other data set because President Herbert Hoover began collecting some of the data way back in the 1920s. So there's a great availability of data.

Then to top it off, the manufacturing data are exceptionally good at predicting the bottoms of recessions, and probably by looking at manufacturing data was the one way you could have determined the recession was over.

Stipp: We're obviously not in the bottom of a recession right now. The drivers that might be affecting manufacturing then perhaps don't apply right now. What is driving manufacturing now? If you want to get a sense of why the manufacturing numbers are doing something, where do you need to look?

Johnson: You need to look at the consumer because manufacturers will not manufacture something unless the consumer is demanding that. You can actually watch what the consumer is doing and then figure out how the manufacturer's going to have to react. That's why the consumer is always in the forefront in my mind and why I watch retail sales. The weekly shopping center data is probably more important than manufacturing especially at this stage of the recovery. That's what drives it. They don't make things for the fun of it.

Stipp: What about exports and goods that are going overseas?

Johnson: Well, you know, there are probably two holes, and you hit one of them in my theory of watching the consumer. If you ship something overseas, obviously that depends on what the demand in China is, what the demand is in Europe, but doesn't depend so much on what things are doing here in the U.S. So that's one of the leakage points, where you can see the manufacturing numbers actually do a little bit better and actually help drive some of GDP and employment up a little bit without really watching the U.S. consumer. But again, exports aren't a huge percentage of what we ship out, and a lot of that's oil and gas and agricultural products. So, it's not a huge leakage, but it did happen a little bit this fall.

Read Full Transcript

Stipp: And you said companies building up their inventories can sometimes cause manufacturing data to move around a little bit and not considering what the consumers doing in some cases?

Johnson: Exactly, and some of it is accidental. Inventories get excited, [and companies] build a little bit too much. Then they have to cut back a little bit more. So it's always going to be more volatile than the consumer numbers. Sometimes what happens, though, is that they intentionally build inventories, which is a good thing. The auto manufacturers in many cases have been building inventories substantially over the last year, moving from 60 days' worth of supply to upward of 90-100 days as they, A, recovered from the effects of the [March 2011 Japanese] tsunami, which completely drained the inventory channel, and, B, have a desire to bring out new models [with the idea that] the more they have on the floor, the more likely somebody is to buy. So they've been really ramping up those inventory numbers in the auto industry.

If you're building inventory, GDP measures P and of course, you need people do that production. So that's what one thing that happened this fall, why the numbers were so strong, and the second half had a lot to do with the auto inventory buildup.

Stipp: So inventory-building  and exports can affect the manufacturing. But in the long run, it's going to be driven by consumer demand. If consumers are demanding, the factories will start building, right?

Johnson: Exactly.

Stipp: So given that, you shouldn't be looking at just the manufacturing data without keeping your eye obviously very closely on the consumer data, but what has the manufacturing data been really telling us lately because that actually has been pretty volatile?

Johnson: It's another one that's like the employment report in that when we talk about, it's so much more useful to look at data over an extended period of time and averaging it rather than looking at one month. I was looking at just the last 12 months. It hasn't even been a recessionary period; it's been a pretty tame period. And we've seen industrial production one month be down on an annualized basis as much as 10% and then up 10% the next month.

So it's been in that plus-10/minus-10 range for the various months of the year. But if you look at the data over the last three years, the growth rate has been between 3.0% and 3.4% in 2011, 2012, 2013, and I'm forecasting for 2014. So, all this volatility and jumping up and down about the monthly reports, this is steady as she goes.

Stipp: Would you say that that's generally matching consumer-spending rates, as well?

Johnson: Well, you know the rate runs just a little bit higher, probably because of the exports and a little bit because of the inventory building. Consumer spending's up more in the 2% to 2.5% range. Maybe there's been a little favoring of goods manufactured in the U.S. recently. That may be part of it, too, but in any case they've been relatively tracking, and you know, we've talked for weeks and weeks that consumer spending has been rock solid since 2011. Guess what? So has manufacturing.

Stipp: What about the durable goods data? What has that been telling you?

Johnson: Yes, that was out this week, and that used to be a really exciting report. We all used to look forward to it. It used to tell us a lot about what was going to happen in manufacturing because you can't build something without an order. Well, a couple of things happened. We got to just-in-time inventory systems, so it made the numbers a little harder to interpret, and then Boeing really screwed up the system because they've got these giant orders for airliners that come in one month, then they don't get another order for an extended period of time, and they get a whole bunch again. Right now, Boeing if didn't get another order their manufacturing rate will continue to go up for the next 10 years. They have that big a backlog.

So you almost have to toss them out of the calculations, and it's made the number a little bit less valuable. Therefore, when I look at it, just the capital goods part of it, excluding the aircraft, and there the numbers aren't so good. We're down five of the last eight months since June. We're down about 3.3% overall in terms of orders for durable goods, excluding the aircraft. That's a little bit worrisome in terms of the durable-goods orders trend to be down that much, and it certainly indicates there isn't a lot of confidence in the business world.

Stipp: Looking ahead to 2014, is there anything to suggest that durable-goods trend might change or that we might break out of that rut we've been in in the industrial production data for the last few years.

Johnson: Well, there may be a few things that help out, maybe something in the computer world, or maybe the housing sector helps a little bit. But generally, a lot of the things that have done really quite well are actually probably going to grow just a little bit slower in 2014 than 2013, and that's what has me just a little bit worried. Take for example, autos. I think they're going to grow this year, which is the good news. The bad news is, it's probably going to be at the lowest rate of the recovery so far. So that will probably hold things back.

I mentioned that Boeing's production has kind of peaked out. Housing isn't lighting the world on fire right now, and that's another area that consumes a lot of manufactured goods. So, if you roll that all together, those are all areas that are growing, I don't want to demean that, but they're not growing any faster. In fact, they're growing a little slower. So I think that's why I'm not expecting a big boom in manufacturing, and I think at some point the inventory build will come to a dramatic end. I think some of the things that are happening in the auto industry looked pretty classic. I mean, they're convinced that we're in a new world, that things have really come back, and that they're really gearing up new models and more inventories. But you know what, we started off [2014] with two very soft months, and now I understand for the month of March that [auto-buying] incentives are the highest they've been since 2010. So, they are kind of desperate to move those cars right now.

Stipp: All right, Bob, it's very important to know how to read manufacturing and what it's telling you. It sounds like it's telling us that we're still kind of in that big ocean-liner economy that's really not changing speed or shifting course too rapidly.

Johnson: Exactly.

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