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Thursday, August 25, 2016

The mixed messages in US manufacturing

Mirus Manufacturing

Recent headlines paint a mixed picture of the US manufacturing sector:

  • “Manufacturing gauge eases in August from nine-month high” (MarketWatch, 8/23)
  • “U.S. Durable-Goods Orders Rebounded in July, Jumping 4.4%” (WSJ, 8/25)
  • “US manufacturing’s ills have been misdiagnosed” (Financial Times, 8/21)
  • “U.S. Manufacturing Growth Cooled in July From One-Year High” (Bloomberg, 8/1)
  • “Surprise! U.S. Manufacturing Jobs Have Been Growing” (Fox Business, 8/2)

Meanwhile, the stock price for global industrial GE is essentially flat for the year, having recovered from the turmoil of mid-January, while others in the sector such as Caterpillar (CAT), Danaher (DHR), ABB Ltd (ABB), Illinois Tool Works (ITW),  are up 15% to 30% year-to-date. The iShares US Industrials (IYJ) is up 13.5% for the year, recently reaching all-time highs, while the S&P 500 is up only 8%.

Data released late this summer suggests that the U.S. factory sector is continuing to expand posting its 5th straight month of growth.  According to Federal Reserve reports, industrial production rose a seasonally adjusted 0.7% in July, its largest advance since November 2014. The overall U.S. industrial output expanded in July.  According to the Institute for Supply Management,  its index of manufacturing activity declined to 52.6 in July from 53.2 in June, indicating continued overall growth at a somewhat slower pace. The ISM gauge “continues to suggest that the downward impetus from the domestic inventory correction and weaker exports has largely run its course,” MFR Inc. Chief U.S. Economist Joshua Shapiro said in a note to clients. He added, “We expect manufacturing output to continue to grow slowly in the months immediately ahead.”

The strong dollar hit the U.S. manufacturing sector hard, making exports more expensive, and the ISM gauge dropped below 50 last fall, indicating a contraction of the sector.   Factory activity stabilized in the spring, with the energy sector assisted by a recovery in oil prices, helping to move the index back into expansionary territory in March.  At the same time, new orders for non-defense capital goods excluding aircraft rose for the second straight month in July –  up 1.6% from June, the largest increase since January.  However, orders in the category were still down 4.3% through July, compared with the same period in 2015.

The consensus seems to be that the worst is behind us and that the second half of 2016 should be relatively positive for US manufacturing.

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Alan Fullerton is a partner with Mirus Capital Advisors. He works with owners of middle market businesses and can be reached at fullerton@merger.com.

 

 

 

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