The U.S. manufacturing sector grew at the fastest rate in five months in November, according to numbers released today by the Institute for Supply Management. The ISM manufacturing index climbed to 52.7 in November from 50.8 in October. (In this index anything above 50 indicates that the sector is growing; below 50 and the sector is contracting.) The reading was near the upper end of economists’ forecasts, which, according to a survey by Bloomberg, ranged from 50.2 to 53 with the median projection at 51.8.

The continued expansion of manufacturing in the United States is in contrast to recent purchasing managers surveys in China and Europe that show this sector contracting in those economies. The index compiled by the China Federation of Logistics and Purchasing, for example, fell to 49 in November.

The auto industry was the biggest single contributor to growth in U.S. manufacturing. U.S. light-vehicle sales jumped in October to a seasonally adjusted annual rate of 13.2 million. A falling dollar, down 9% since June against a trade-weighted basket of currencies, has also contributed by boosting U.S. exports. August and September were the best months for U.S. exports on record, according to the Commerce Department.

In other words, despite everything, the U.S. economy looks like it will continue to grow at a moderate pace through the end of 2011.

Stocks seem disappointed with good U.S. manufacturing news

Shucks.

That seems to be the stock market’s reaction today to the Institute for Supply Management’s report that U.S. manufacturing expanded in August.

Economists were expecting that the survey would drop to a reading of 48.5 for the month. Anything below 50 indicates that the sector is contracting.

Instead the index came in at 50.6, signaling the sector continues to expand, if only by the slimmest margin. That’s below the 50.9 recorded in July and the lowest reading since July 2009. But even if just barely, this is on the expansion side of the ledger.

So why would that be a disappointment to U.S. markets?

Because even very modestly good news at this point reduces the odds that the Federal Reserve will launch a big new round of bond buying. And a third program of quantitative easing, a QE 3, would have more power to drive up stock and bond prices than a modestly positive manufacturing number does.

Think of it this way—right now a small bit of positive news is actually a negative for the market in the opinion of big institutional investors and traders.

I know that seems perverse but in the short term the markets sometimes work that way.

If you’re worried that the U.S. economy is slowing, you got plenty of data this morning to confirm that view.

The Institute for Supply Management Manufacturing Index, a survey of purchasing managers in manufacturing companies that asks whether business conditions are better or worse than they were last month, fell to 53.5 in May from 60.4 in April. Although any reading   above 50 indicates that the economy is expanding, the drop would seem to confirm other evidence of a slowing in manufacturing activity. The drop was also bigger than the decline to 57.6 that economists were expecting, according to Briefing.com. The index is now at its lowest level since September 2009.

The market’s fragile optimism from yesterday’s solid rally wasn’t enough to sustain this bit of bad news plus a slowing in the purchasing managers indexes in China and Europe. And a report from the ADP Employer survey showing that the U.S. economy only added 38,000 workers in May. As of 1 p.m. in New York the Standard & Poor’s 500 stock index was down 1.36% and the Dow Jones Industrial Average was down 1.43%.

What none of this data tells investors, however, whether what we’re seeing is a temporary slowdown or the beginning of a lasting downward trend.

Certainly any investor can point to events that might have produced a temporary slowdown in May. Read more

Which data should you believe on the direction of U.S. economic growth?

Durable goods orders fell by 0.9% in February. Economists had expected a 1.8% increase in orders.

After supporting a reading that the economy was recovering through most of 2010, since October 2009 durable goods orders have shown a confusing pattern.  In the last two quarters orders have declined in the first month of a quarter before rebounding in the second and third months of the quarter.

That pattern hasn’t held this quarter with the 0.6% drop in February following on the heels of a 3% decline in January.

The two consecutive monthly drops in durable good orders run contrary to an extremely positive increase in the ISM purchasing managers index to 68 in February. That’s the strongest ISM number since January 2004.

I think it’s too early to pick between the two data series—for that we’ll need at least another month or two of data—but I’m worried that the decline in durable goods orders is confirmed by a drop in non-defense capital goods (excluding aircraft). Read more

One long-term consequence of the earthquake, tsunami, and nuclear meltdown in Japan will be an acceleration of the hollowing out the Japan’s export manufacturing

One criticism of Japan’s big exporters during the strong yen period is that companies like Sony, Toyota, and Canon had been slow to move production out of Japan to low-cost production platforms such as China and Vietnam.

Part of that came from a reluctance to disrupt long-term relationships with suppliers in Japan. Part of it came from a frayed but still strong traditional commitment to life-time employment for workers.

Whatever the reason Japanese companies haven’t moved a aggressively as those in the United States to send manufacturing functions and manufacturing jobs overseas.  And that left Japanese companies paying higher costs as the yen appreciated.

The destruction of factories at companies such as Toyota have garnered the bulk of the headlines during this disaster. But Toyota can relatively quickly shift production to overseas plants.

The thousands of smaller companies that make up the supply chains for the big exporters don’t have that flexibility. Many are tied to a single plant and right now they’re looking at either the destruction of their own factories or of the exporting giant they supplied.

Some of these plants will get rebuilt—but many won’t or when they are the operators of these factories will find that some of their work has fled overseas. That one reason the Bank of Japan and the Japanese government is flooding the economy with money. They want to see Japanese factories rebuilt quickly to minimize job losses.

I doubt they’ll be very successful. After all the off-shoring of Japanese manufacturing was a long-established trend before this disaster. It was only the pace of the transition that was at question.

Now I think that pace will pickup. Eventually that will be good news for the profits of Japanese exporters. No way it’s good news for Japanese workers or the Japanese economy.