Manufacturing Is Digging Out

The PMI indices for MFG from Markit show an ongoing improvement across the e-zone. The e-Zone index is still some 8.9 points from its cycle peak but it has risen by 18 points from its cycle low. Greece at 10.6 points above its cycle low has had the smallest recovery from its low point. The UK Germany and France have risen the most from their respective low points but the UK stands the closest to its cycle peak reading standing only 2.2 points below its cycle peak reading in December. Spain, Greece and France are still the farthest away from their respective cycle peaks.

In December among the countries in the table only Spain saw a set back. This is marked improvement from November when five of these countries experienced a set back in the month’s MFG PMI reading.

Spain’s index has fallen on balance over the last three months. It is the only one in this group to do so. However Austria and Greece rose by less than 0.5 points on balance over the last three months compared to an e-Zone index rise of 2.3points. .The e-Zone advance is now being led by improvements in Italy and in Germany but all the e-Zone countries in the table above are advancing at a slower rate than they had over six months (multiply the respective three month gains by a factor of two to see this). The UK, an EU member, is an exception to this trend as it is still accelerating.

Spain, Greece and Ireland are the only countries in the table that are not back into pre-recession ranges for their MFG PMI readings (levels). The UK is the only country that is near the top of its pre-recession range in terms of its overall PMI index (March 2000- Jan 2008).

On balance the e-Zone is still making progress. Some choppiness in the indices in this region is to be expected if the recovery is going to continue but lose some of its gusto. If the recovery is going to gain speed we will need to see these indices continue to advance. The signals right now seem to favor a period of consolidation and of continued but slow growth progress.

Improvement in the U.S. factory sector continued last month from its nadir reached twelve months earlier. The National Association of Purchasing Management reported that its December composite index showed unexpected strength with a rise to 55.9 from 53.6 during November. The latest figure was the highest since April 2006 and it was up from the low of 32.9 reached last December. A more modest gain to 54.0 had been the Consensus expectation. (Any reading above the break-even point of 50 suggests rising activity.) The ISM data is available in Haver's USECON database.

The positive factory-sector growth rate suggested by the ISM index is in line with recoveries accompanying past upturns from severe recessions. To mirror the strength of those recoveries, however, the index still needs to rise to a level near or above the level of 60.

The new orders index showed the greatest m/m gain with its increase to a high of 65.5 from 60.3 in November. Working the other way, the export order index fell moderately to 54.5 from its recent high. Nevertheless the index was up from its low of 35.5 last December. During the last ten years there has been a 53% correlation between the index and the q/q change in real exports of goods in the GDP accounts.

The employment index showed a smaller gain 52.0. Nevertheless, the level indicated positive growth in factory-sector payrolls. It has increased from a low reading of 26.1 last February. Seventeen percent of respondents indicated higher payrolls versus only seven percent last December. Eighteen percent indicated a lower level of hiring versus fifty percent last December. During the last ten years there has been a 90% correlation between the index level and the three-month change in manufacturing payrolls.

The production component rose modestly to 61.8 but remained lower than its October high of 63.3. During the last ten years there has been an 84% correlation between the level of the production component of the composite index and the three-month growth in factory sector industrial production. It is appropriate to correlate the ISM index level with factory sector output growth because the ISM index is a diffusion index. It measures growth by using all of the positive changes in activity added to one half of the zero change in activity measures.

A two point gain in the inventory component to 43.4 recovered some of its November decline but it still was down from the October high. Thirteen percent (NSA) of respondents indicated that they were raising inventory levels versus 18% last December. During the strong 2005 inventory accumulation 26% of firms indicated that they were raising inventories. Thirty percent of respondents indicated lower inventories.

The separate index of prices paid made up more than half of its November decline and was up from the December low of 18.0. During the last twenty years there has been a 79% correlation between the price index and the three-month change in the PPI for intermediate goods.

The ISM data are available in Haver's USECON database.

Monetary Policy and the Housing Bubble is the title of yesterday's speech by Fed Chairman Ben S. Bernanke and it is available here. 

Though its rate of decline has moderated, construction spending has continued to move lower. During November construction outlays fell 0.6% after a little-revised 0.5% October shortfall. The latest decline left the y/y change at -13.2% which was improved just modestly from the weakest -15.8% September comparison. The latest decline about matched Consensus estimates.

Residential building activity renewed its decline with a 1.6% fall following a 4.8% October gain. The decline owed to a 4.1% (-44.4% y/y) drop in multi-family building and a 3.9% (-2.8% y/y) shortfall in spending on improvements. Single-family construction rose 1.3% (-25.2% y/y) for the sixth consecutive monthly increase.

Nonresidential building activity was roughly unchanged after a steep 4.8% October decline. Since the 2008 peak, activity has fallen by 22.5%. Spending in the food & beverage industry declined 44.1% y/y while expenditures in the lodging were off by nearly one-half. Commercial building overall fell 40.5% y/y while office building dropped by more than one-third. Relatively moderate were the declines in the education (-18.8% y/y), religious (-18.3% y/y) and health care (-16.1% y/y) sectors. Factory sector spending (-7.0% y/y) was buoyed by gains in the chemical and in the computer/electronic/electrical sectors.

In the public sector, construction overall fell a modest 0.4% during November but y/y expenditures rose despite lower tax revenues. Building activity on highways & streets fell 2.9% m/m but rose 5.7% y/y due to the focus on infrastructure rebuilding. Public spending on health care facilities increased a strong 12.2% y/y but building in the education sector was off 2.6% y/y.

The construction put-in-place figures are available in Haver's USECON database.  

While Indonesia has had extensive damage from earthquakes, it has so far escaped a recession.  The closest it has come was the fourth quarter of 2008 when real gross domestic product increased at an annual rate of only 0.80%.  Subsequent increases have been 3.58% in the first quarter of 2009, 5.49% in the second and 6.64 in the third quarter. The annual rates of increase in real GDP over the past six years are shown in the first chart.

Today, the consumer price index for December was released. Inflation continues to be well behaved although there has been a slight increase in the last two months.  The rate of inflation as measured by the year to year increase in the seasonally unadjusted consumer price index was 2.78% down from 11.06% in December of 2008.  The course of inflation in Indonesia is shown in the second chart.

Also released today were Indonesia's exports, imports and balance of trade.  There has been a rising trend in the balance of trade from the 640 million USD deficit in October,2008.  Exports at 11,562 million USD are below the peak level of 12,499 million USD reached in June of 2008 and imports at 9,563 million USD are well below the peak of 12,142 million USD reached  in July 2008.  The third chart shows exports, imports and the balance of trade over the past six years.