Consumers Pace Factory Improvement U.S. factory activity slowed for the fifth straight month in February, but there is evidence that global headwinds for the manufacturing sector may be easing.
The American consumer could be coming to the rescue of the nation’s beleaguered factory sector.
A key gauge of manufacturing activity rose last month to its best reading since September, despite global headwinds that are weighing on exports and keeping inflation in check. The gains reflected solid demand from domestic consumers who once again are proving to be resilient in the face of overseas uncertainty.
The Institute for Supply Management said Tuesday that its gauge of manufacturing activity rose last month to 49.5 from 48.2 in January. While a reading below 50 indicates the factory sector is contracting, the pace of the decline was less severe than it had been in recent months.
The improvement “is largely driven by domestic orders and that’s driven by consumer spending, ultimately,” said Bradley Holcomb, chairman of ISM’s Manufacturing Business Survey Committee. The most recent manufacturing downturn could prove to be a temporary slump, he said, and the sector could return to expansion “in the next month or two.”
February’s reading remains below the index’s 12-month average of 50.5. But it’s the closest the sector has been to expansion since September. (…)
The latest gauge showed that factory exports contracted at a faster pace and prices charged by manufacturers are still decreasing. Both hint at the dollar’s strength, though the currency’s appreciation has leveled off in recent weeks.
New orders in February, a sign of demand, stayed in positive territory for the second straight month. And the outlook for manufacturing employment improved, though it remained negative.
Production of goods that often end up in consumers’ hands increased last month, including furniture, appliances and food. Increased demand for manufactured products is consistent with other figures showing Americans are spending more.
The uptick in manufacturing data “should reduce concerns that the U.S. economy is slipping into recession,” said PNC economist Gus Faucher. “Manufacturing will not add much to growth in 2016, but neither will it subtract much. Instead, service industries and construction will lead the U.S. economy forward.”
Overall consumer spending grew in January at the fastest clip in eight months, the Commerce Department said last week. Year-over-year retail sales rose at the fastest rate since late 2014 in January. And demand for cars and trucks bounced back in February after being chilled by an East Coast blizzard in January, industry data released Tuesday showed.
Those gains are in line with other data suggesting consumers can support economic growth. Consumer spending accounts for about two-thirds of total economic output.
Hiring has been steady and worker wages are growing at the fastest pace since the first months of the expansion. Output of services, which are more domestically focused, has expanded for six straight years, according to ISM. But it slowed sharply in January from December. February’s non-manufacturing data will be released Thursday. (…)
Are we there yet? Are we at the point where the benefits of low energy prices are more than offsetting the costs, at least in the U.S.? I have documented the strength in consumer spending on Goods since November which no doubt helped clear excess inventories and eventually revive manufacturing demand. The ISM says so even though its February New Orders Index was unchanged at 51.5 and that it says that a reading of 52.2 is generally necessary for higher manufacturing orders.
But Markit’s own survey does not lead to the same optimism:
(…) the latest reading pointed to one of the weakest improvements in overall business conditions since the recovery began in late-2009. (…) Volumes of new work increased moderately in February, with the pace of expansion easing to one of the slowest recorded over the past three-and-a-half years. Anecdotal evidence suggested that clients had delayed spending decisions in February amid caution about the business outlook.
Overall, manufacturers are not yet showing much enthusiasm as both surveys indicate lower input buying last months.
Lastly, foreign manufacturers are not seeing much improved demand from the USA. From the J.P. Morgan Global Manufacturing PMI:
February saw the growth rate of global manufacturing output slow to near-stagnation. Inflows of new business rose only marginally, while new export orders and
employment both contracted. (…) The trend in international trade remained subdued in February, as levels of new export business contracted for the first time in five months. New export orders fell in the US, China, Japan, Taiwan and the UK, but rose in the eurozone, India, Malaysia, Vietnam and Brazil.
But even in the Eurozone,
rates of expansion in new business and new export orders eased to the weakest since April 2015 and January 2015 respectively.
Hopefully, February’s Services PMI will be ok…
Based on an estimate from WardsAuto, light vehicle sales were at a 17.43 million SAAR in February. That is up about 7% from February 2015, and mostly unchanged from the 17.45 million annual sales rate last month.
The value of construction put-in-place increased 1.5% during January (9.5% y/y) after a 0.6% December gain, revised from 0.1%. It was the strongest rise since May, and exceeded the 0.5% increase expected in the Action Economics Forecast Survey. During the last three months, activity grew an average 0.5% per month.
Strength in public sector building led the January gain with a 4.5% jump (9.0% y/y), following a 3.3% December increase. During the last three months, activity grew an average 1.7%. Highway and street construction jumped 14.7% (31.7% y/y) while commercial construction surged 6.5% (63.1% y/y). Power construction rebounded 5.0% (-8.7% y/y), but health care building declined 5.0% (-1.9% y/y).
Building activity in the private sector increased 0.5% (9.7% y/y) following a 0.3% December decline. During the last three months, activity improved an average 1.7%. A 1.0% increase (11.3% y/y) in nonresidential building led the monthly increase. Residential building activity remained unchanged (8.0% y/y) after a 0.8% rise. Multi-family construction rose 2.6% (29.6% y/y) following a 2.7% increase. Single-family building eased 0.2% (+6.9% y/y) after a 0.9% rise. Spending on improvements fell 0.7% (+1.2% y/y), and has been declining for ten months.
CHINA
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Signals of Improved Conditions in Cyclical Sectors Insufficient to Conclude Economy on Verge of Recovery
CEBM’s March Grassroots Survey results display that overall sales activity met expectations in the month of February. The CEBM Composite Sales vs. Expectations Index rose from -10.0% in February to 2.1% in March. The slight rise in the composite index reading was led by improving conditions in cyclical sectors, especially stronger-than-expected bank lending and housing market conditions. Meanwhile, this month’s survey showed a further slide in consumer sector activity.
After a record volume of new lending in January, banking sector survey feedback indicates that the scale of new loan issuance in February likely decreased M/M by roughly 30%-40%. However, on an annual basis estimates indicate that the scale of February issuance remained near historical highs. Survey respondents reported that new lending was concentrated in traditional infrastructure, civil engineering, and state-owned enterprises.
In the real estate sector, respondents reported a notable post-Spring Festival recovery in sales activity accompanied by rapid price increases in 1st tier cities. Respondents attribute price increases in 1st tier cities to additional housing sector policy easing in February (i.e., further easing of mortgage down deposit ratios on first-home and second-home purchases and home transaction tax cuts) accompanied by mortgage lending support. Recent sector easing failed to stimulate price increases in most 2nd tier and 3rd tier cities, but sales expectations have improved.
Looking forward to March, the CEBM Composite Expectations Index increased from from -45.26% in February to -4.54% in March. The rise in the composite expectations reading was driven by improvements in both consumer sector and industrial sector sentiment. However, on a 3MMA basis the composite index reading has shown very limited improvement. Signals of improving conditions in cyclical industries have been observed at the start of 2016, but these signals are insufficient to conclude that the economy is on the verge of recovery. For instance, although real estate market conditions in 1st tier and 2nd tier cities have improved at the start of the year, new starts activity has yet to respond. In addition, the recent policy-expectation-driven rebound in upstream industrial prices and capital goods could lose steam if the economic policy agenda announced during China’s National People’s Congress in March underwhelms.
(…) Perhaps most worrying of all, however, was the accelerating pace of job looses signalled by the survey. Factory employment suffered the largest monthly fall since January 2009, when jobs were being culled at the height of the global financial crisis.
The steepening decline in employment indicates that the process of reducing excess capacity in the manufacturing sector is still very much ongoing. We note that larger firms have seen particularly steep job cutting, with a more modest rate of job losses seen in smaller firms.
The US rating agency revised its outlook on China from stable to negative, the first major step on the country by a rating agency since Fitch downgraded its rating three years ago, the first cut since 1999.
Moody’s rates China’s government at Aa3, its fourth highest rating. That is in line with Standard & Poor’s double A minus rating, although S&P maintains a stable outlook. Fitch assesses China at A plus, one notch lower than its two peers, also with a stable outlook.
In addition to rising debt and falling reserves, Moody’s attributed its move to “uncertainty about the authorities’ capacity to implement reforms — given the scale of reform challenges — to address imbalances in the economy”. (…)
Recent policy moves, including record bank lending in January and a cut to banks’ required reserve ratio on Monday, suggest policymakers are prioritising short-term stimulus over structural reforms, including efforts to rein in debt.
“It is a matter of balance. Reforms could indeed slow growth in the short term. [But] if they were reforms that pointed toward a levelling off of leverage and more efficient allocation of capital, then we would see that as a positive,” Marie Diron, senior vice-president for sovereign ratings at Moody’s, said in an interview.
“There will be significant further fiscal and monetary stimulus to maintain growth at robust levels. If that stimulus then delays reform, then we think it’s a negative signal.” (…)
Moody’s estimates China’s explicit government debt at 41 per cent of gross domestic product at the end of 2015, up from 33 per cent in 2012. But the agency notes that the government also faces large contingent liabilities, including debt owed by state-owned enterprises, policy banks and local government financing vehicles. (…)
SENTIMENT WATCH
In an interview with Reuters Jennifer Ablan after DoubleLine Capital’s February flow figures were released (it was a $2.2 billion inflow) , Gundlach said the firm is now considering closing out some of its long positions in the stocks that they purchased three weeks ago.… And just to avoid confusion, this is where Gundlach stands now: “I am bearish. There are just wiggles and jiggles in the markets.”
First rally from 1810 fizzled at 1946 (+7.5%). This second rally from 1810 to 1981 is +9.4%. The 200-d m.a. (2026) is only 2.3% above and is declining. We sure need good stats, positive narratives (the WSJ has been in a good mood lately) and, maybe, Super Mario…
Three Weeks After Buying Stocks, Gundlach Is Cashing Out Again: “I’m Bearish”