VIPs
- Leading indicators within the ISM report suggest upside in December’s industrial sector; the New Orders to Inventory spread has turned positive, hitting a six-month high indicating positive momentum as previewed in the November regional Fed reports
- Inventories appear to be “too low,” falling to an eight-month low corroborating the need to replenish depleted stocks; sector-specific optimism from the leading chemicals sector suggest upside in manufacturing hours worked outside the GM-strike relieved auto sector
- The LEI six-month trend signal flipped to a -0.2 reading in October for the first time since May 2016, but near-term upside suggests a potential turn; it’s unclear at this stage that the positive momentum catalyzed by restocking will carry over via sustained end demand
What do meteorologists and economists have in common? No, that’s not the opening line to a joke nor are they walking into a bar. The “not punchline” (no relation to “not QE”) is nowcasting. In meteorology, nowcasting employs data from surface weather stations, wind profilers and any other relevant sources to explain the current weather and forecast by extrapolating what’s to come. In economics, nowcasting tracks the present to predict the very near future and the very recent past. Gross domestic product (GDP) is the popular forecast target because of its long-lagged release and subsequent numerous revisions. It’s as real time as gauging the economy gets, at least by design.
The Institute for Supply Management (ISM) has joined the nowcasting crowd. October’s ISM Manufacturing report premiered a headline which read, “GDP Growing at 1.6%.” That rate was replaced with 1.5% for November. Whereas ISM had previously buried its nowcast in the bowels of the report, an ISM contact confirmed this will be a regular feature going forward to provide the key takeaway to even the casual observer. Get in line, ISM, behind the widely followed numbers from the Atlanta and New York Feds, the former of which expects fourth quarter GDP to grow at 1.3% while the latter is pegging growth at 0.8%.
If GDP is as deep an analysis as you require, stop reading now. If you’re more intellectually curious, have a gander at the chart of the day which paints a happier picture for the U.S. industrial sector over the balance of December.
You’ll notice the red line is borrowed from last Tuesday’s Feather, but in this case covers the U.S. instead of Germany. It illustrates the closely followed New Orders to Inventories spread and its current positivity suggests that demand is running ahead of supply, i.e. factory activity should speed up. The 1.7-point spread was a six-month high and echoed data across regional Fed districts in November.
We’re not daft and did see that New Orders disappointed market expectations, capping the upside to yesterday’s momentum trade in global 10-year yields. Rather, to herald the New Year, we are providing forward guidance for the next New Orders figure that will hit in January 2020.
The blue line depicts a component of the Customers’ Inventories index — a short-run leading indicator for New Orders. Respondents who answered their inventories on hand were “too high” fell to an eight-month low in November. This sharp turn screams that inventories are “too low” and buyers will need to replenish stock by ordering more as soon as next month. ISM noted that this development “is positive for future factory output.” We will take the “over” on the December ISM New Orders index on January 3rd.
Before Father Time turns the page on 2019, the ISM guideposts we cite also point to upside risk for other U.S. data – namely, December 6th’s Employment report, December 17th’s Industrial Production report and December 19th’s Index of Leading Indicators (LEI).
With the resolution of the GM strike, the market had already factored in a technical bounce in manufacturing hours worked. But the ISM also reported that other leading industries, such as oil (chemicals input) and chemicals (which leads the broad industrial space), saw increased production. The dye has thus been cast — watch for gains in manufacturing worker hours outside the auto sector this coming Friday. These same hours worked are similarly used to derive Industrial Production.
The LEI doesn’t carry much weight during an economic expansion, especially one this long, unless it starts falling in a consistent manner – which it did in August, September and October. The veracity of the signal rose more yet when the reliable six-month trend signal flipped to a -0.2 reading in October for the first time since May 2016.
Peering into the LEI’s internals, the rebound in the stock market, building permits and core durable goods already portended well for November’s read. Tack on a bump in manufacturing hours worked and we could see the LEI reverse course.
For all of our enthusiasm given the foundation laid for a bounce in U.S. industrial output, the shoots could be more yellow than green. As you can see, there were multiple instances of restocking headed into the last downturn. And why shouldn’t there have been? Manufacturers are in business to produce widgets in some form. Throwing in the towel on demand means not producing said widgets. Ergo, not restocking is a last resort move to transition to survival mode.
Optimism for a sustainable rebound as seen in the arrested decline in nowcast forecasts may be justified. Or manufacturers are restocking in the midst of a trade war. Until we know, avoid the mistake of many a reviled meteorologist. Don’t extrapolate too much into the future.