This page has been archived and commenting is disabled.
Important Manufacturing Indicators Look Weak
From The Daily Capitalist
There are a lot of indicators that have been published recently that show continuing weakness in the economy which will lead to declines in output. The key indicators to me are the decline in factory orders and the build-up of inventories. I expect this trend to continue.
The important indicators are:
ISM Manufacturing Index
Lagging factors gave what is a bit of a deceptive boost to the ISM's manufacturing index masking a further slowing in the key leading index of new orders. The PMI came in at a stronger-than-expected 56.3 for a sizable eight tenths gain from July. The reading is well over 50 to signal month-to-month growth and in the comparison with July, to signal growth at an accelerating rate. But this growth is in general business activity: production, employment, inventories. These three factors all accelerated in August with a special note on inventories where the gain may reflect in part an unwanted build.
Here is the money comment (Emphasis, mine):
New orders slowed but just a bit, down four tenths to 53.1 for its lowest reading since the manufacturing recovery began in the second quarter of last year. Unfilled orders also slowed, down three points to 51.5 and its weakest reading since December. The slowing in order build is certain to limit future improvement in business activity.
From the Wall Street Journal
What has not been encouraging is the slowdown at the wholesale level as June inventories rose 0.1%:
From the Wall Street Journal
We will have to wait until the week of the13th when the wholesale inventory numbers for July come out to see if this trend is continuing.
Factory Orders
Yesterday's increase in the ISM's manufacturing composite for August, which gave a big lift to the stock market, masked cracks in order data. Similar cracks appear in today's factory order data for July. New orders edged only 0.1 percent higher following a 0.6 percent decline in June (revised from minus 1.2 percent) and an unrevised 1.8 percent decline in May. The data are being skewed slightly lower by non-durables, a group exposed to swings in commodity prices. Yet the durables sector isn't all that hot either showing a 0.4 percent gain in July (revised from plus 0.3 percent) following a small decline in June and a not-so-small 0.7 percent decline in May.
Unfilled orders also show weakness, down 0.1 percent for durable goods in July following fractional gains the prior two months. With slowing rates of orders coming in and backlogs being worked down, the outlook for shipments is no longer so good. Shipments did jump 1.1 percent in July but a significant degree of this, due to lead times, reflects the filling of prior orders. On inventories, yesterday's ISM data offer hints that a significant build is underway, one that may prove to be unwanted should orders fail to pick up. Inventories jumped 1.0 percent in today's data.
Other readings are also less than positive. Capital goods data show strength in shipments, tied here definitely to the group's long lead-times, but show significant and surprising weakness in orders. The factory sector remains at the crossroads, having led the economy out of recession but now showing an aging slope.
From the Wall Street Journal
The market has been going gaga over these numbers, don't ask me why (ask DoctorX). On one side of the world, Europe's indices are weak. On the other side, China is flat, but Taiwan, South Korea are down. The market reacted very positively to the fact that China's version of an ISM report was up 0.5% (to 51.7 from 51.2). I don't see it myself. As fiscal stimulus is wearing off, and as the housing bubble is starting to burst, I wouldn't expect much growth out of China. Did the bulls check the consumer data in Europe and here?
Productivity and Costs for Q2
Due to the slowdown in output and businesses already having cut labor costs to the bone, productivity fell notably in the second quarter [This puts upward pressure on wages.]. Nonfarm business productivity declined an annualized 1.8 percent in the second quarter after a 3.9 percent advance in the prior quarter. The market had forecast a 1.9 percent dip in productivity. Unit labor costs rebounded an annualized 1.1 percent in the second quarter, following a drop of 4.6 percent in the first quarter.
Unit labor costs in manufacturing declined 5.9 percent in the second quarter of 2010 due to both the 4.1 percent increase in productivity and a 2.0 percent decline in hourly compensation. Unit labor costs fell 7.3 percent over the last four quarters, the largest four-quarter decrease since the series began in 1988.
Retail
ICSC Goldman Report:
Chain-store sales rose 0.1 percent in the August 28 week, ending four weeks of decline. The year-on-year pace, at plus 2.8 percent, is up five tenths in the week but is still on the soft side. The four-week average for the year-on-year pace, at plus 3.0 percent, is down three tenths in the week and is the softest since late June. The report says warm weather continues to hurt demand for fall and back-to-school apparel.
Redbook:
Chain-store sales improved slightly in the August 28 week, according to Redbook's tally which shows a plus 3.0 percent year-on-year pace vs. a plus 2.6 percent pace in the prior week. Yet the trend is very steady, showing a four-week average of 2.8 percent over the past two weeks and 2.9 percent over the five prior weeks. Redbook sees month-to-month sales rising 1.0 percent in what is a positive indication for the ex-auto ex-gas category of the monthly retail sales report.
Not good, not bad:
Yet chain-store sales are far from strong. Year-on-year rates are barely above water and bottom lines are being squeezed by the necessity of markdowns. Reports on the back-to-school season are mixed while reports on the effects of the hot weather are mostly negative as summer items have already been cleared from shelves. A phrase repeated again and again out of the sector is that consumers are shopping closer than ever to need.
Personal Income and Consumption
The consumer made a comeback in July-in both income and spending. Personal income in July posted a 0.2 percent gain, following no change in June. The July figure was a little lower than the consensus expectation for a 0.3 percent rise. More importantly, the wages & salaries component rebounded 0.3 percent after slipping 0.1 percent in June. This component would have been even stronger had it not been for a dip in government payrolls from laying off temporary Census workers. Private industry wages and salaries gained 0.5 percent in July, following a 0.1 percent dip in June.
The Fed is depending on the consumer to counter a faltering housing sector and Bernanke & Company got its wish at least for July. Overall personal consumption increased 0.4 percent in July, following a flat number in June. The latest beat the market forecast for a 0.3 percent gain. By components, durables jumped 0.9 percent, nondurables rose 0.3 percent, and services gained 0.4 percent.
Not a bad report, but I'm not certain it can be sustained. Without strong gains in disposable income or employment, and the above chart doesn't show that, it is doubtful that we'll see strong consumer spending. Especially when you consider that one reason for the little July bump in spending was that consumers drew down their savings to pay for it. Savings decreased from 6.2% to 5.9%:
From The Wall Street Journal
Note that the savings rate has been fairly steady since the beginning of the Crash, except for the Cash for [Whatever] spending spree in H1 2009. I doubt that we'll being seeing any significant increase in consumer spending as consumers continue to save at relatively high rates and continue to deleverage.
Tomorrow (Friday) the jobs report will be coming out and everyone is holding their breath. I won't comment on it until I see the numbers.
»
- advertisements -
The current shtick on Wall Street right now is to say shares are cheap in relation to forecast company profits, the so-called price-to-earnings ratio. Today, the PE on the market is about 12 times: In other words share prices are 12 times forecast earnings. By historic standards, that sounds pretty low. The average has been about 15.
But the numbers should be treated with caution.
First, those earnings forecasts are unreliable. Analysts are usually too optimistic. Even in an average year, actual earnings across the market typically come in well below the forecasts. David Rosenberg, economist at Gluskin Sheff in Toronto, estimates the average miss is about 20%.
And this isn't an average year. Profit margins spiked to record highs coming out of the crash, as companies slashed costs and ran down inventories. The future is obscure, but margins seem more likely to contract than expand further. Historically, corporate profit margins have shown a strong tendency to revert to their averages.
There's no one perfect guide to whether the market is cheap or not, but here are a few measures that may give you pause.
Take the so-called "Cyclically-Adjusted Price-to-Earnings" ratio, which compares share prices, not simply with one year's profits, but with average earnings across an economic cycle of about 10 years. (This CAPE is often known as the "Shiller PE" after Yale economics professor Robert Shiller, one of its leading proponents.)
The CAPE has been a pretty good guide for investors over a very long period of time. It told you, correctly, to get out of stocks in the late 1920s, the mid-1960s, and the bubble a decade ago. It told you to buy aggressively after the second world war, and in the "death of equities" period of the 1970s and early eighties.
Over the past century or so, the stock market has, on average, been about 16 times cyclically-adjusted earnings. Today, it's about 20 times. Make of it what you will. But it's not cheap.
Or take the lesser-known "Tobin's q." A calculation, named for the late economist James Tobin, that compares stock prices with the replacement cost of company assets. It has a very similar track record to the Shiller PE.
The q on the market is about 1 today, says economic consultant Andrew Smithers. The historic average is just 0.64. By this measure, the market would have to fall a third just to reach its average. Again: This is cheap?
Or take another measure, "price to sales." This compares stock prices to corporate revenues, rather than earnings. The rationale is that sales tend to be less volatile from year to year. This data, from FactSet, goes back to 1984. By this measure, shares certainly look a lot cheaper than they were in 2000 or 2007. But they are still much higher than they were before the bubble began in 1995. Ominously, they are higher today than they were just before the crash of 1987.
Still hungry for more? Consider another measure, "enterprise value to EBITDA." This compares the value of all company stocks and debts with earnings before interest, taxes, depreciation and amortization—a key measure of operating cashflow. Many companies recently have been levering themselves up, borrowing more in the bond market. But all shares and bonds must, ultimately, be supported by cashflows. By this measure, share prices are still way above levels seen prior to the last 13 years.
Finally, you could try comparing the market value of equities with total U.S. gross domestic product. Once again, that's been a reasonable guide to some of the great buying and selling opportunities of the past. Data from Ned Davis Research show that U.S. stocks are valued at about 85% of GDP today. The historic average, says Ned Davis Research, has been about 60%.
http://finance.yahoo.com/banking-budgeting/article/110559/why-stocks-still-arent-cheap?mod=bb-budgeting
very good post; thank you.
DOW chart update:
http://stockmarket618.wordpress.com
On the surface that income number looks like it is headed in the right direction....woudl like to see the details behind that?
Got momentum? 1 time luck, 2 times a trick, 3 times a trend?
Next time people try to trash the BDI, keep this chart in mind:
http://dailycapitalist.com/wp-content/uploads/2010/09/Factory-Orders-July-2010.png
Hey Chemba ... Obama won't be around much longer ...
The guys in the Pentagon want him out for National
Security Reasons.... 1963 all over again...
That's really interesting. Do you have some references that I can follow up on?
Thanks in advance.
Great Report... Good Job... Easy to understand...
bottom line get out of paper assets...
Buy more Silver Maple Leafs ...
"personal income" up. who cares, it's just more ponzi BS. An increasing percentage of so called "personal income" is just transfer payments from the Socialist ObaMao/Pelosi administration. Subtract out the incremental transfer payments and let's see how much personal income is up. and it's not as if those transfer payments are supported by anything other than incremental government debt, i.e. they are not supported by pre-tax income of the productive class.
Estimates are going down faster than barney frank on prom night.