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Dismal Manufacturing Data Confirm Sharp Slowdown

Monday, 02 July 2012 11:21 AM

INDICATOR: June Supply Managers’ Manufacturing Survey/Help Wanted Online Survey

KEY DATA: ISM (Manufacturing): 49.7 (down 3.8 points); New Orders: 47.3 (down 12.3 points); Production: 51 (down 4.6 points)/ Online Vacancies: Up 232,000

IN A NUTSHELL: Any doubt that the economic brakes have been hit should be wiped away by the sharp slowdown in manufacturing.

WHAT IT MEANS: The world economy has been depending upon the U.S. to keep things going and the manufacturing sector has been the broad shoulders for whatever growth we have experienced. Well, the burden of carrying the world around is causing the industrial base’s back to break.

Manufacturing slowed dramatically in June. For the first time in three years, the Institute for Supply Management’s index of activity turned negative, led by a dramatic downturn in new orders. Nearly a quarter of the respondents reported that demand had slowed compared to May order levels. With Europe in chaos, export demand is dropping like a rock as well.

Interestingly, import demand held up pretty well, which doesn’t seem to make a whole lot of sense. As a consequence, backlogs are disappearing leading to a slowdown in production. With all this weakness, it is not surprising that cost pressures are fading rapidly as well.

As bad as the ISM report was for the general economy, there was some good news for the labor markets. The supply managers indicated that hiring continued at the same solid pace in June as it has all year. That was buoyed by the Conference Board’s Help Wanted Online Index which indicated that vacancies in June soared to their highest level in the 6 1/2 years this survey has been around.

A jump of this magnitude raises the possibility that the June employment numbers, which come out on Friday, could be better than expected. No one is predicting they will be good but they may not be a disaster that many think is possible.

MARKETS AND FED POLICY IMPLICATIONS: The decline in manufacturing activity is distressing as this sector has been the leading light of the economy. It appears that Europe may be having a bigger impact than expected not simply because demand is falling.

The uncertainty during June over whether a solution of some kind to the European financial crisis would be possible probably made many U.S. firms who sell into the Continent very cautious. Indeed, consumer spending has not slowed so much that by itself it would have led to the sharp decline in demand that the supply managers reported.

All we can hope is that the recent decisions in Europe will provide the foundation for stabilization and that will ease some of the corporate angst.

But that remains to be seen and we will have to wait for the July numbers before any conclusion can be reached. Nevertheless, this report will not be enjoyed by investors.

Ultimately, though, the 800 pound gorilla remains the jobs report and with some good news on that front, the markets may not react too badly.

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Monday, 02 July 2012 11:21 AM
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