Tags: naroff | manufacturing | ism | purchasing-managers

Manufacturing Softens as Companies Turn Cautious

Tuesday, 04 Sep 2012 03:53 PM

INDICATOR: August Supply Managers’ Manufacturing Survey

KEY DATA: ISM (Manufacturing): 49.6 (-0.2 point): Orders: 47.1 (-0.7 point)

IN A NUTSHELL: “Manufacturing is softening as all the issues facing not only the U.S. but Europe and China as well are causing firms to become more cautious.”

WHAT IT MEANS: We just may have to get by without Atlas holding up the world. During this recovery the manufacturing sector has been the bright light. The bulb is dimming. For the third month in a row, the Institute for Supply Management’s manufacturing index pointed to the sector in a contracting mode.

Unfortunately, the details were even more disconcerting. New orders, which had been surging into the spring, are declining and that led to the first drop in production in over three years. Given the decline in backlogs, the growing inventories are probably not happening because firms expect activity to accelerate.

The excess stocks will have to be worked off through even more reductions in output. And while payrolls are still rising, they are doing so very slowly. In other words, there was no good news in this report.

MARKETS AND FED POLICY IMPLICATIONS: With the election campaign ramping up and the attacks becoming even more ridiculous than usual, business and household psyches cannot be expected to improve over the next few months.

That does not bode well for an economy that is being battered by events outside the country. Europe is still struggling with a credible debt plan and China looks like it is faltering more than many expected.

The nastiness of the election campaign at all levels increases the likelihood that the economy could actually fall off the fiscal cliff. The biggest thing we may have to worry about is CEOs worrying about Washington. To the extent that the political insanity is causing companies to become more cautious than the current growth rate would warrant, we are stuck with a self-fulfilling prophecy.

About the only thing that keeps me from getting truly depressed is the simple fact that households are actually spending money. The early news on August vehicle sales is pretty good, as were initial chain-store sales. If people keep their wallets open, firms will have to respond and that will keep the economy growing, though the pace is likely to remain tepid.

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