Friday, September 11, 2009

News That Doesn't Depress You: Manufacturing Expands in August, Following 18 Consecutive Months of Contraction

The Institute of Supply Management's Purchasing Manager's Index (PMI) measures manufacturing expansion and contraction. When the PMI exceeds 50, the manufacturing sector is expanding. Less than 50 indicates a contraction. In August, the index was 52.9, the highest since June 2007.

Some industries are performing better than others. Industries that expanded include:

  • Textile Mills
  • Apparel, Leather & Allied Products
  • Paper Products
  • Miscellaneous Manufacturing
  • Printing & Related Support Activities
  • Computer & Electronic Products
  • Transportation Equipment
  • Nonmetallic Mineral Products
  • Electrical Equipment, Appliances & Components
  • Fabricated Metal Products
  • Chemical Products

Manufacturing industries still contracting include:

  • Primary Metals
  • Plastics & Rubber Products
  • Furniture & Related Products
  • Wood Products
  • Food, Beverage & Tobacco Products
  • Machinery

Representative comments from the survey respondents include:

  • "Production is picking up as demand [for] orders is being accelerated." (Nonmetallic Mineral Products)

  • "Demand from automotive manufacturers increasing thanks to 'Cash for Clunkers.'" (Fabricated Metal Products)

  • "In addition to improved business come the complications of a supply chain drained of inventory." (Paper Products)

  • "The sudden increase in customer demand, plus the low inventories held at services centers, is causing a shortage in the supply of raw steel." (Transportation Equipment)

  • "[It] appears customers' inventories are getting low, and they are cautiously placing orders." (Apparel, Leather & Allied Products)

CNBC's Larry Kudlow commented on the ISM report in his weekly editorial column:

At this pace, there could be 4 percent growth in real GDP for the third quarter.

Within the index, new business orders soared to 64.9 (the highest level since December 2004), production jumped to 61.9, and vendor performance improved to 57.1. This last statistic is important since vendor performance tracks supplier deliveries. When economic conditions heat up, deliveries tend to slow down. Think of Amazon delivering books a day or two later when orders are rapidly rising. And with inventories now at rock-bottom levels, businesses are going to have to rehire workers in order to reignite the production process and meet new demand.

Four percent growth is a lot lower than the 7 to 8 percent growth one would expect after a deep recession. That was the robust expansion pace we witnessed in 1983-84. But 4 percent growth becomes a V in light of pessimistic forecasts of 1 or 2 percent growth, or even a double-dip recession.

Kudlow credits the Fed's easy money and the market's ability to self-correct for economic mistakes as the reason we're emerging from the recession.

"While so-called spending-and-deficit stimulus may be an economic depressant, Friedmanite monetary stimulus -- which has been substantial -- is gradually exerting a powerful impact on economic growth," wrote Kudlow. "At the same time, businesses have become lean and mean, with radical cost-cutting of inventories, employment, and hours worked. That’s setting up a big profits surge, which is the biggest economic stimulus of all."

Kudlow is taking the Austrian economic view of the market, which makes him more bullish than Keynesian analysts currently holding sway on Wall Street. Kudlow notes that, "In Hayekian and von Misean terms, bad investment and spending decisions are being remedied through the free-market corrective process. And greased by easy money, today’s market correctives may produce a much stronger V-shaped recovery than the stock market consensus expects."

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