Growth in the manufacturing sector of the U.S. economy, which has led the economic recovery, actually accelerated in January according to the ISM Manufacturing Index released yesterday February 1. This survey of attitudes among purchasing managers climbed to 60.8 in January from 58.5 in December. January’s reading was the highest since May 2004. (In this index anything above 50 indicates expansion. Below 50 shows contraction.)
There was strength right down the line in the index. New orders picked up to 67.8 from 62.0 in December. The order backlog index rose for the first time since August 2010 to 58.0 from 47.0 in December.
There was even good news for the job market in these numbers as the employment index, which measures respondents’ willingness to hire, climbed to the highest level since 1973.
The strength of the numbers surprised economists. According to Briefing.com, economists had expected the index to drop to 58.4 in January from December’s 62.0.
The strength in U.S. manufacturing found an echo in numbers from the United Kingdom, where, despite a contracting economy, manufacturing grew at a record rate in January, and from China, where a purchasing managers index from HSBC and Markit Economics climbed to 54.5 in January.
Unfortunately, manufacturing accounts for only about 11% of U.S. GDP.
The next big piece of U.S. economic news comes on Friday with the release of the January jobs numbers. (Today the ADP survey of employers showed job growth of 187,000 for January. While encouraging, this survey often doesn’t correspond very closely with the government jobs numbers.) Economists are expecting a relatively disappointing 148,000 net new jobs for the month. That would be up from the 103,000 net jobs in December but still well below the level needed to cut unemployment significantly.
Ogreggy,
I agree that the article is myopic in that it talks about the current state of economic affair and not the consequence, but that is the intention – state the current trend in the economic climate. It is up to you to read into it and react with your investment.
I very much agree with you and do worry about the structure of this economy and whether this is real economic growth or growth on borrowed money. In time we will know and should see it in the the import and export number. If the ratio of import to export increase then we yet again growing the economy on borrowed money. If it decreases then we have a healthy economic growth in that we are selling more produces to the world.
In either case and from a short term investment perspective, I would be a buyer of US stock market as the economy is growing.
This brings up another topic and it is with the QE2 and the deflating dollar. This is where it is nice to be the currency of the world. QE2 is helping by decreasing the value of the dollar and consequently help equalize the cost of production – we have quite a way to go, but at least this is getting things going in the right direction. At the same time, the deflated dollars means that the exporters (our manufacturer, technology company and farmer too) will be earning more money in term of US dollars from their exports (The more reason why I think we should be investing in US stock market). They then can hire more and produce more.
Of course there is the potential consequence of hyperinflation (ex: this would happen if everybody starts to dump the dollars) and I think the Fed will watch out for that.
Back to my earlier point of whether our economic growth is export driven or import driven. If economic growth is export driven then in the future we will just have an economic slow down and in which case I will cash out of the US stock market and buy US bonds. If it is import-consumption driven then we will have hyperinflation/depression and I would think about holding foreign currency and assets, but I don’t think that will happen because…
It may sounds like I am boasting about the US economic might here…Let’s not forget that we are the #1 economy in the world, our companies are global, very competitive and highly innovative, our people are free and strong, and our free and capitalistic society enables all that I have mentioned. And so I can only think that we will come out strong again.
Good luck to all!!!!
Domino412,
If you are an investor and plan to continue to be one, you may want to consider a change to your investing approach to one based on dollar-cost-averaging. There are many studies showing that most people who try to time the market behave exactly as you have done and lose money.
Ogreggy (and others who are pessimistic on the recovery),
If we define recovery as corporate profits or GDP, then we’ve completely recovered. Corporate profits and GDP are at all-time highs. (If we define recovery as jobs, obviously we’re still in the hole, but accelerating in the right direction.)
Don’t fool yourselves. We are living through the biggest economic expansion in the history of the world. The number of consumers in the market, their demand for products, and their cumulative purchasing power is larger than it has ever been. This is a recipe for growth, and it’s not stopping.
I can name many companies expanding through sales: FSLR, AAPL, DE… the list goes on and on. Open the statement of cash flows on a random set of businesses in the S&P500 and I bet you’ll be surprised at the number of companies with growing cash from operating activities. Is there innovation out there? You bet. In ten years, we’ll be doing things we can only imagine today.
There are two factors at play: 1) Dominant narratives, and 2) Corporate Sandbagging (of earnings numbers for easier earnings growth in the future)
At any time, there is a widely accepted “dominant narrative” which is used to explain the current state of affairs. That dominant narrative tends to take hold after a period of time to explain events which recently occurred. Thus, the narrative is, by definition, a backward looking picture. It has no predictive abilities. The narrative persists long after its usefulness. Do not invest based upon it.
Take the narrative of “rising housing prices” which persisted from 2005 through 2007. It was obvious (to me) that housing prices were too high – in fact, prices had already peaked and begun to decline – but the narrative was “on”, so people believed despite the evidence before their eyes. Then came the narrative of “economic collapse” to explain the falling housing prices, stock prices, and layoffs between Sept 2008 and March 2009. That narrative is no longer accurate, but due to the shock factor of the events (the mental scars it left) and the real loss of money and jobs, this narrative persists and will persist for another couple years until job growth really picks up. Again, the evidence is before your eyes showing growth, but it is hard to believe – because it conflicts with the narrative.
Meanwhile, profits have recovered. They actually have. No, jobs haven’t. Tax revenues have not. That is a question about what we do with our profits, not whether or not they are real. You can either benefit from this growth by owning stocks, which is what I choose to do, or sit it out. Your choice.
The other factor at play is “kitchen sink” quarters. Again, examine the statements and the accounting methods used to determine earnings numbers. Executives know that it’s the earnings number which gets talked about, and that’s what they manage, with all kinds of trickery. By keeping earnings deliberately low, they can set low expectations by having an easier number to beat the following year. Do the hard work and compare the Income Statement to the Statement of Cash Flows. Are they synchronous? Do they match? Of course not. And that’s why the “beat the numbers” game will continue to be successful, which is what I’ve publicly predicted on this blog for each quarter for the last year. So, due to corporate sandbagging, things are not only good, they’re actually even better than they seem.
And that’s another reason to own stocks.
One word of caution: eventually “economic vibrancy” will become the dominant narrative, and no amount of sandbagging will be able to keep the numbers down. Less companies will “beat” earnings each quarter. That will be when your friends, who are currently jobless and afraid of investing, are telling you about the money they’re making in stocks. Domino412 may be buying stocks at that time. (Domino, I jest.) At that point, you want to get cautious.
There is a lot of wisdom in reading the crowd. It sounds crazy, but it’s one of my best investment indicators. I have a couple friends who are bears who think the stock market is rigged. When they get bullish, I’m going to run for cover.
So, with regards to Jim’s article, manufacturing job growth is real, and it will make a real difference for a lot of people and the economy as a whole. It’s a good think that we should be happy about, even if it doesn’t match our preferred narrative at the moment.
@ogreggy
I could not agree with you more! Great post.
In my opinion, despite the new technologies that came about over the last 25 years, our economy for the most part has been based on debt (public and private) because we do not have the manufacturing base to justify our growth. Instead we have had one debt bubble after another, and now the FED wants to inflate the bubble yet again. Will they succeed? I don’t know – I hope not. I do hope to see an uprising in this country that will throw the bums out. No more FED, and no more two party dictatorship.
I seriously doubt any significant job growth. Here is a simple reason why. All the previous post-recession job growth periods were associated with a new sector in economics (telecom, dotcom, computers, health, etc. – you can name one for any given growth period). There is nothing like that happening right now. Not so many people care about environment any more, and all the alternative energy jobs are shipped overseas prior to be created.
Sure, some jobs are created, but those are enough enough to compensate for a massive job loss of this recession.
@kfed … I was taking issue with the article because the changes to the economy (at the margin) are very minor and basically the result of unsustainable debt financed stimulus.
Consumer spending without consumer income is better known as debt. It is not the sign of a healthy economy.
Its great that @lameduck has retooled his manufacturing plant, but the manufacturing sector is still a very small percent of the economy… that’s a fancy way of saying its too small to pay back the debt that was used to facilitate the retooling. If retooling had made economic sense, one wonders why lameduck didn’t do it on his own.
The fact of the matter is the economy must now produce significant growth just to pay the additional interest on the national debt. If you want to argue that this debt was somehow an “investment” in the future, then the economy must grow fast enough to pay the interest AND also retire some principal. There is no one claiming any principal will be retired. Its not real growth, its just growth borrowed from the future.
My comment about restructuring the economy appears to have been misinterpreted by @kfed and perhaps others.
I am saying that we will need to do that (or similar) restructuring BEFORE any true recovery occurs.
Any recovery based on still more debt is not a recovery at all… Mr Jubak argued (in this and an earlier post) that the economy was somehow recovering based on increased consumer spending (that was not matched with increased income, so it was MORE debt). And Mr Jubak cited ISM manufacturing survey … which is nice except that the sentiment is nothing more than sentiment. Jobs are still missing, income is still missing, tax receipts are still missing …. and the one “shining light” from @lameduck was paid for with increased taxpayer debt, not actual money.
None of this is the making of an honest recovery. If Mr Jubak wants to claim the economy is turning a corner, please stop telling us about piles of debt that are almost as high as the snow outside my house. Show me the money. Real money, real income, real spending (not debt).
Show me companies that are expanding based on their own business cashflow, not debt stimulus. Show me consumers buying a flat screen TV with increased earnings, not an increased Visa credit limit. Show me the stock of a company that is increasing earnings with an exciting new product, not by laying off staff.
If racking up billions (trillions) of debt was a sign of a recovery, then Government Motors wouldn’t have needed yet another taxpayer bailout. Greece has piles of debt. Banana republics the world over have piles of debt. Economies that are actually growing have piles of cash (or they are at minimum paying down debt). The US economy is adding $1.5 TRILLION in new debt this year … that is not a recovery.
Consumer spending numbers and ISM are obvious fraud. We all know there is no actual cashflow behind any of it — just more debt.
Manufacturing wages average $22/hr. in the US as opposed to $11 for service sector jobs. The recent upswing in manufacturing hiring, now almost a year old I recon, should continue into the near future as transportation from and labor cost in the Far East continue to climb. A great of deal of efficiency has been built into domestic manufacturing as a result of this downturn, and this is just beginning to be measured. I know, I work in a small manufacturing plant. We just spent last year buying new equipment (thanx everyone for the tax breaks) and hiring staff. Two thirds of what we produce is for export, up from one third two years ago.
Mr. Jubak, I do respect, appreciate, and enjoy your blog, otherwise I wouldnt follow you each day as I have since 2007. I went back and reread the column, and re read my comments. You were stating the factual information, and I think I was just “key happy” and making negative comments. My comments were not intended to be negative against you. Kfed above is right. I just am basically disgusted because of this massive rally which I have missed out on again for the most part, because I have not agreed with the recovery. And I sold out of positions in 2008 and 2009 and took massive losses and now see it was all unnecessary. You know, everyone was talking about the sky falling then and now its all a bed of roses somehow. Oh well, my problem I know.
Mr. Jubak, I do respect, appreciate, and enjoy your blog, otherwise I wouldnt follow you each day as I have since 2007. I went back and reread the column, and re read my comments. You were stating the factual information, and I think I was just “key happy” and making negative comments. My comments were not intended to be negative against you. Kfed above is right. I just am basically pissed because of this massive rally which I have missed out on again for the most part, because I have not agreed with the recovery. And I sold out of positions in 2008 and 2009 and took massive losses and now see it was all unnecessary. You know, everyone was talking about the sky falling then and now its all a bed of roses somehow. Oh well, my problem I know.
Guys,
Jim is not telling people that everything is rosy. He is pointing out that there are positive signs out there. Sure we are not where we like to be as we are deep in the hole and go longer way to go. If you suspect that the market is not correct then don’t participate or short the market and I do that from time to time.
You guys are arguing for changes to our economy and government. I think you are just arguing it in the wrong forum.
Mr Jubak, I think if you talk to actual retail employees (instead of listening to govt statistics), you would be singing a different tune. One associate at the local Best Buy described the holiday spending binge in one simple explanation: “people want to save face. they buy a big screen TV for the Super Bowl and then return it the following week”.
The local Home Depot has boxes and boxes all over the place that have obviously been opened and then returned.
Consumer sales only counts “sales”, not sales adjusted for returns. Very big difference
The ISM Survey is essentially a pep rally. Of course we all think our team is going to win the big game!! But the same manufacturing managers are not hiring full time workers. No one believes the government stimulus spending can continue long term, and outside that stimulus (and related inventory adjustments), the underlying economy is still very very weak.
Wall Street needs to pay more attention to Main Street, and a lot less attention to government statistics. Every Main Street magazine had been reporting about the housing bubble for years when Wall Street was somehow surprised. No one could have seen it coming? For crying out loud Bankers, the housing bubble was on the cover of every major magazine. You had to be in denial not to see it coming
Wall Street remains in denial, which is why it continues to see a recovery.
Main Street knows there will be no recovery unless and until the economy restructures. That will mean fewer bankers, fewer lawyers and fewer government bureaucrats… another words, the political elite have the most to lose when (not if) the adjustments occur.
Its the same problem in Europe. The same problem in Egypt, Tunisia, etc. The same problem causing suicides in China’s factories.
I see lots of new debt funding lots of new government agencies. I don’t see any improvement in the real economy, not even at the margin.
The economy needs more factories producing real goods at a profit. We don’t need more TSA agents groping our wives. We don’t need municipal workers demanding increased pensions, when “we the people” no longer get a pension at all.
All government statistics are geared toward measuring yesterday’s economy — the debt based economy that collapsed. They are all absolutely useless in measuring the degree of restructuring (or lack thereof). And they won’t be of any use once the economy does restructure (which still looks a few years away)
domino: “It makes no difference about manufacturing”? Manufacturing jobs sure don’t pay what they used to but they are among the better paid jobs in the economy and they aren’t as likely as service jobs to be temporary. I agree with your point about the increasing gap between the wealthy and everyone else in our society but I don’t think that’s reason to make up facts.
ogreggy, I’m sorry but what evidence do you have that the ISM number is “obviously fraudulent.” It’s an “obviously limited” number in that the survey just asks purchasing managers their opinion of conditions. But “obviously” fraudulent? Consumer spending and manufacturing activity are up. Are they up enough to change this from a jobless to a job-creating recovery? Not yet. So far. You need to distinguish between an improvement (which is real) and an improvement that may still bring us to a place that’s not good enough.
@domino412… I regret that I have to concur with your assessment.
I have long followed Mr Jubak’s recommendations, but I fear he has become part of the system, and part of the problem. How else to explain his last two reports? Consumer spending is up in December? And now we are told manufacturing is up?
I get it that Wall Street wants to sell their inventory to us – dubious ethics, but at least one can see why Wall Street wants to believe the lies.
Why do you suppose Mr Jubak is buying into this nonsense?
The sky isn’t falling — but we heard lots of talk about an imaginary recovery last spring. Bernanke even started talking about how the Fed might normalize interest rates.
Maybe wo months later, the same Bernanke was telling us that the economy needed **EMERGENCY*** liquidity measures (QE2, etc).
This is the same guy that told us the subprime contagion was well contained. The same guy who said Bear Stearns was a one off event. The same guy who assured us that FNMA and FHLMC were solvent and in no need of rescue.
The political elite really need to re-connect with the real world. I think the economy and the country “can” be turned around (ie it is possible) — but not unless and until we start dealing with our problems and stop trying to cover them up with obviously fraudulent economic statistics
It makes no difference about manufacturing. The jobs created by the majority of this are low pay, poverty level wages, where the employers hire temporary short-term help , then lay them off. We have two distinct classes now. 1. The affluent, who are buying the goods and 2. The struggling who are working, but on government subsidies also. ex. welfare, food supps, UI, medicaid,etc. etc. These people work, but get earned income tax credits. So, these people are putting nothing into the system, they are basically a burden to the allready burdened system. What you are seeing in Greece and right this moment in Egypt is what will eventually happen here. Social unrest and riots against the haves and have-nots. Mojority on Wall Street have no clue as to how half of the reall world really lives. Wake up call is coming!