Tuesday, December 1, 2009

Manufacturing Moves Forward

The Lehmann Letter ©

Today the Institute for Supply Management reported that its Purchasing Managers’ Index fell slightly in November to 53.6: http://www.ism.ws/ISMReport/MfgROB.cfm

Recent data are:


Since any number over 50 signals expansion, you can see that manufacturing has been moving forward for the past four months.

Purchasing Managers’ Index

(Click on image to enlarge)

Recessions shaded

The chart also makes clear that manufacturing has been in the doldrums and is only now pulling out of a steep trough.

There are three principal influences on manufacturing: (1) Autos and residential construction and other household expenditures, (2) Business capital expenditures and (3) inventory maintenance.

1. Autos and residential construction are at the heart of the current crisis. They won’t recover strongly until households feel comfortable about borrowing once more. And that won’t happen until time heals households’ balance sheets, which are currently suffering from too much debt. It will be a while before household spending recovers.

2. Business capital expenditures are waiting for the recovery of household expenditures. They will follow, not lead.

3. Inventory maintenance probably explains manufacturing’s recovery. The recession caught manufacturers with excess inventories on hand. As sales slowed manufacturers stopped production and sold from their stocks of goods on the shelf. Manufacturers have finally reduced these stocks after many months of inventory liquidation. As inventories are depleted and fall into a leaner relationship to sales, manufacturers can resume production. (No manufacturer wishes to be caught short without goods on hand.) That’s where we are now.

But inventory replenishment alone cannot rescue manufacturing. Household expenditures and business investment must recover before manufacturing turns robust once again.

(The chart was taken from http://www.beyourowneconomist.com. [Click on Seminars and then Charts.] Go there for additional charts on the economy and a list of economic indicators.)

© 2009 Michael B. Lehmann

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