INDICATOR: January Manufacturing Activity and December Construction
KEY DATA: ISM (Man.): +3.1 points; Orders: +4.4 points; Production: +9.5 points/ Construction: -0.2; Private: -0.1%
IN A NUTSHELL: “The manufacturing sector started expanding again in January, but it isn’t clear why that happened.”
WHAT IT MEANS: Manufacturing had been faltering for much of 2019 and then the GM strike hit. We got over that impediment but Boeing then shut part of its production. Despite the chaos, the Institute for Supply Management’s manufacturing activity index jumped in January. This was the first time since July 2019 that the measure was above 50, which means the sector is growing. The consensus was for the number to show activity still slowing, though at a lesser pace. The details backed up the rise. New orders, including exports and imports, were strong and production soared. But hiring was still contracting and order books thinning. We have not seen any surge in durable goods orders and while some of the trade concerns have dissipated, the solid improvement in manufacturing implied by this report is not backed by other data. I will take the rise as a positive sign, but it would be nice to have supporting figures and a better understanding why this happened. I will wait a couple of months before I can believe the weakness in manufacturing is behind us.
As for construction, it is largely going nowhere. Private sector spending faded in December as a large drop in nonresidential activity overcame a solid rise in home building. Public sector construction spending was also down, though public housing activity improved. For all of 2019, private construction spending declined, which is a real disappointment.
MARKETS AND FED POLICY IMPLICATIONS: Let’s hope the supply managers’ measure does indeed point to better times for the manufacturing sector. This has become a real weak link, but part of that was due to the GM strike and the problems with the 737 Max. We don’t know how much Boeing’s assembly line shutdown will take out of growth this quarter, but it is likely to be fairly large. And who knows how the coronavirus will affect not only the Chinese economy, but also the U.S., EU and especially the developing nations that depend upon China to buy materials. That is why I am reticent to declare that happy days are here again. Still, you take the good news while you can. But it isn’t the economic data that are driving equity prices. The ebb and flow of coronavirus news is the focus of attention. China seems to be acting much more forcibly, but an awful lot of cats have been let out of the bag and they are hard to herd – something we cat “owners” know so well. With no real understanding of the extent of the problem, the huge movements in the markets are both understandable and disturbing. But until we know more, look for the wild ride to continue.
Joel L. Naroff is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm.
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