Manufacturing Might Not Be Dead After All
July durable goods orders jumped an exceptionally strong 4%, exceeding expectations. Unfortunately, the gains were highly concentrated in the auto and aircraft industry. On a month-over-month basis, primary metal was the only other category to show an increase.
While I'm not a fan of this concentration, orders for cars and autos often lead to increases in orders in other categories in subsequent months. What's more, the three major "up" categories comprised almost 40% of all new orders.
July is always a hard month to read because June represents the end of a quarter and in many cases the end of a fiscal year. There is often a rush of orders at the time as customers put the screws to vendors trying to make their quarterly numbers. I think this trend has been stronger in recent years than the seasonal factors used by the government. It makes more sense to me to look at the data on a year-over-year basis to eliminate some of these seasonal factors. I also like to use a three-month moving average to smooth the monthly volatility, especially due to volatile data from the aircraft and auto sectors. I prefer this methodology rather than tossing out the transportation sector outright, because transportation orders represent more than 25% of all durable goods orders.
Interestingly, shipments of durable goods have been improving. While orders are probably a better indicator of future events, shipments and production are what drive the GDP calculations. The news here is good and likely to improve more as the Japanese auto industry ramps up again.
International Purchasing Managers' Reports Stabilising Too
Hidden in all of the week's data was an improvement in the Chinese PMI and a stable reading for Europe. At a minimum, I think this means manufacturing is not completely falling off. But by no means are things as strong as they were a year ago. For example, the China PMI registered an improvement to 49.8 from 49.2, though still down from readings in the mid-50s several months ago. That type of reading for China is still consistent with industrial production growth of 13%, not too shabby. The European index also did better than expectations, basically holding steady at 51.1. According to our industrials team, the report showed improved momentum in Germany and slower results in France. Unfortunately, the new orders component of both reports suggested that there could be some slowing in the index in the months ahead.
Home Prices Up?
Believe it or not, home prices increased for the second month in a row according to the Federal Housing Finance Agency. Prices increased 0.9% in June after a 0.4% increase in May, which should bode well for the more closely watched Case-Shiller home price index due this week. But on a year-over-year basis, prices are still down about 4% and about 19% from the April 2007 peak. Stabilising prices, along with greater home affordability and lower mortgages, should eventually fuel increased home purchases. By regions, price appreciation ranged from a negative 0.8% in the Western region to a stunning 3.3% gain in the East North Central region.
New Home Sales Stuck in the Mud
That was not the case with last week's new home sales report, which showed new home sales fell 0.7% to 298,000 units roughly in line with expectations. Foreclosures and relatively high prices compared to existing homes are keeping a lid on new home sales. In fact, those sales remain perilously close to multidecade lows. Inventories sound particularly skinny at 165,000 units. That level looks infinitesimally small compared with the 110 million or so existing households. If the market ever regains momentum, there is almost no supply.
This Week: Personal Income, Purchasing Managers' Report, Jobs, and Autos
This week, the national Purchasing Managers' report will get a lot of attention--perhaps more than it deserves. Based primarily on poor regional results announced earlier this month and fears of slowing exports, experts are expecting the PMI report to show a decrease from 50.9 for the July release to 49.7. I can picture the headlines now: "PMI Drops to a 24-Month Low, Below Critical 50% Level, Indicating Declining Manufacturing Sector." Wrong!
To greatly simplify, managers are asked whether things are getting better, getting worse, or staying the same in this survey in several different categories (orders, production, employment, and so on). The ISM adds all the "getting better" responses and adds half the "staying the same" responses, producing a total that generally ranges between 30 and 70. While much importance is attached to the 50 number, the statistical work by the ISM suggests that the reading has to dip into the low 40s to indicate an upcoming recession.
The ratio dipped below the magic 50 four times in the 1990s, and only at the end of the decade did we actually get a recession.
Also, while constructing an index this way gets to a quick answer, it does suffer some statistical problems. What the index fails to capture is if a few industries are doing really, really well while the majority are muddling along the flat line, the index will show a poor result. Last week's durable goods report highlighted that very same issue. While categories representing 60% (in dollar value) of durable goods were down and only 40% were up, the total dollar value of orders was up an impressive 4%. That's because the transportation sector was up 14.6%, which swamped the down categories that were down mostly in the low-single-digit range.
Personal Income and Spending Report Could Be Interesting
Just last month in the annual GDP revisions, the real disposable income report was revised sharply lower, which came as a bit of a surprise. It changed the picture from one where the consumer was spending relatively in line with incomes to one in which it looked like the consumer was dependent on savings and stock market gains. Lo and behold, last week buried deep in the technical section of the GDP revision was a footnote that real disposable income would be revised up again based on new data concerning bonuses. Now instead of growing at annualised rate of 0.7% in the first half, it now looks like the growth rate was 1.1%.
Anyway, based on better employment data for July and relatively high inflation, the consensus is for personal income to be up a strong 0.4% and spending to be up 0.5%. The bad news is that the CPI for the same period was also up 0.5%, potentially wiping out most of those gains. I am hopeful that the income and spending gains will be a little better than consensus and the price deflator used for personal income and spending will turn out to be a little less than the CPI, producing real disposable income growth of a tenth or two. The numbers should look a lot better for August when inflation could get near the zero mark again.
Auto Still Affected by Supply Issues
You know the auto supply issues have to be bad when competitors start poking fun at Honda (HMC) and Toyota (TM) in their television commercials.
Nissan (NSANY) is currently running a couple of ads highlighting supply problems and Honda and Toyota. Here's a link to one of those Nissan commercials.
All of this is long-winded way to say that August auto sales won't be anything to write home about with high prices and low supply, not to mention a slightly scared consumer. July sales were about 12.2 million units and the consensus for August is the same, which strikes me as just a bit high. Numbers should begin to look better in September and October as increased production hits the showroom floor.
Jobs Report Will Be Stung by Verizon Strike
The consensus is for job growth to fall from 117,000 in July to 55,000 in August. At least part of that decline is due to the Verizon strike mentioned above. But a generally weakening economy suggests to some economists that things may get so bad we could see an outright decline in jobs. Based on modestly improved weekly claims numbers and respectable manufacturing numbers I don't think a decline is in the cards, but as with all government reports anything is possible. Even though a small decline isn't that much different from a small increase from an economics standpoint, an outright decline would put investors in a very foul mood.
