Manufacturing's Mean-Reversion And Another Summer Slump

Tyler Durden's picture

While not being cool enough to warrant instant-QE, the June employment report reinforced the sense that US growth has slowed further and that the labor market recovery remains sluggish. Besides the underwhelming employment report, this week’s releases offered more signs of slowing in the US manufacturing sector. The ISM manufacturing index falling below the symbolic 50 threshold for the first time since JUL09 and hard data on manufacturing activity, such as factory orders, have also cooled. Goldman's Zach Pandl notes that deteriorating external (Europe and China) demand is likely one factor behind the slowdown (with ISM new export orders index -11.5 points between APR and JUN) but suspects domestic factors could be at work as well. In particular, the slower growth in the US manufacturing sector could simply be that activity has already rebounded substantially since the recession (dominated by the channel-stuffing, China-dependent Autos sector). If the relatively fast growth in the manufacturing sector over the last few years reflected a “catch-up” from exceptional weakness in 2008-09, then this tailwind should gradually diminish and this led them to lower their Q2 GDP estimate to +1.5% as we face another sluggish summer.


Zach Pandl, Goldman Sachs: Less Manufacturing Momentum

Besides the underwhelming June employment report, this week’s releases offered more signs of slowing in the US manufacturing sector. The ISM manufacturing index declined to 49.7 for June, falling below the symbolic 50 threshold for the first time since July 2009. Hard data on manufacturing activity have also cooled. For instance, growth in domestic manufacturers’ orders has slowed to an annualized rate of -1.0% over the last six months in nominal terms, or -3.6% adjusting for inflation . The ISM survey’s new orders index as well as those from the regional manufacturing surveys suggest orders growth could remain weak for the time being.

Deteriorating external demand is likely one factor behind the manufacturing slowdown. US manufacturers export about 20% of their total output, and exports account for about 50% of final demand for US products (a large share of manufacturing output is used as an intermediate input in the production of other goods ). Therefore, slowing growth in foreign economies has likely weighed on firms’ orders and sales. This is certainly one of the messages from the latest survey data: the ISM new export orders index declined by 11.5 points between April and June, the largest two-month drop on record except for September-October 2008. Anecdotal commentary from ISM survey respondents also explicitly noted slowing growth in Europe and China as reasons for recent weakness.

However, we think domestic factors could be at work as well. In particular, one reason for slower growth in the US manufacturing sector could simply be that activity has already rebounded substantially since the recession. If the relatively fast growth in the manufacturing sector over the last few years reflected a “catch-up” from exceptional weakness in 2008-09, then this tailwind should gradually diminish.

The data seems to support the idea that a period of catch-up may have been an important driver of manufacturing output growth. For example, the decline in manufacturing production during the recession was well beyond what would be predicted by the sector’s “beta”—its normal responsiveness to changes in the overall economy. We estimated a simple regression model which explains quarterly changes in manufacturing industrial production with a constant and changes in real GDP (sample is 1970-2007). We then simulated the model-implied path for manufacturing production since 2007, based on known GDP data. Exhibit 1 (above) shows that manufacturing production declined much more than predicted, even after accounting for the sector’s high beta.

Manufacturing output has since increased sharply, but the level of activity was only recovering toward the model-implied level. Based on these simulations, it is not obvious that the manufacturing sector has outperformed the rest of the economy. Manufacturing output may simply have been very weak, and has normalized more recently. This is essentially the same argument that Chairman Bernanke has made about surprisingly large declines in the unemployment rate.


A breakdown of manufacturing growth by detailed sector looks consistent with this story. Exhibit 2 compares the recovery in output by type of product to the size of the decline during the recession (the size of the bubbles represents each product’s share of manufacturing output). The positively sloping relationship means that the sectors with the largest declines in output during the recession were also the ones with the strongest recoveries—motor vehicles being the most extreme example. There are a few sectors which had large production losses and little recovery (e.g. apparel and leather goods), but there are no examples of sectors with small production declines and rapid recoveries. Indeed, only 2 of the 20 detailed components of manufacturing industrial production have current levels of activity which exceed their pre-recession peaks.


Finally, it is noteworthy that the manufacturing sector has not yet grown as a share of the economy compared to pre-recession norms. According to new quarterly data published by the Commerce Department, gross value added of the manufacturing sector was 12.2% of GDP in Q4 2011, close to the average of 12.3% in 2005-2007 (Exhibit 3). With only a stabilization in the manufacturing share of output, it is not obvious whether fundamentals have changed for the sector, or whether solid growth over the last few years simply reflects the bounce back from a deep recession.

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DoChenRollingBearing's picture

Manufacturing seems to be slowing all over the world.  I write about this and other topics on my Review of Barron's at my blog.  There is also an ad for anyone interested in interest rate swaps from a company claiming expertise in defaults in them...  Other recessionary risks are out there too...

The Monkey's picture


You need to do an expose on the US EXIM bank. Afterall, this is yet another taxpayer backed GSE, essentially. And it has been lending with wreckless abandon at rates that put foreign companies at an advantage to their American peers.

Getting Old Sucks's picture

American peers?  Yup all three of them :-)

knukles's picture

Accurate DoChen, but sure does seem to somewhat understate the enormity, the depth, breadth and significance of the situation, globally.
The entire system if slowing, is a slow motion train wreck, the bridges falling, buildings collapsing upon themselves, people disappearing, waters turning to flaming blood, entire cities being gobbled up by an encroaching desert of despair and degradation of the human condition.  The Four Horsemen of te Apocalypse riding into the entire big screen as if liberating the oppressed only to find gruesome, terminal eradication of the character via the very universal defects of the human condition.
Poverty, misery, pain and suffering multiplying like the proverbial locusts, people painting the blood of lambs about their doors to no avail, the moneychangers retaking the temples.
A very economic, social, political and spiritual degradation of mankind itself

Yes, slowing

Caviar Emptor's picture

Yep. We are in the middle of a manufacturing renaissance, they tell us, while roads, bridges and water mains are collapsing. We are in a renaissance while US-made autos are an even smaller sliver of the domestic market than before the recession. Construction? Durable goods orders? 

thefedisscam's picture

If only the U.S. could pull 20% of OUT OF defense spending, and put it into civil infrastructure rebuilt within the US, the whole world as well as the US themselves will be in a better shape.

maximin thrax's picture

While I agree with the sentiment, we'd still go bankrupt just as fast. The first 20% cut from every program, and the next 20% as well, is necessary just to get a balanced budget.

Hell, if we ever got a ballanced budget, we'd have no money for private construction contracts, and nobody to do public works projects except for, oh, a few tens of millions of unemployed and underemployed, and a few million more freshly cut from public employment rolls. /

Newsboy's picture

Dochen: "Manufacturing seems to slowing all over the world"

The supply and demand links have been perverted by global capital dictating economic terms to human producers and consumers, terms that make you donate a kidney to pay the mortgage, or commit suicide.

Croney global capitalism has created a new perverse variation of "centrally planned economy" and hidden it in plain view.

The decline in cheap resources can't be ignored any more either.

What happens next?

veyron's picture

Next time click on the "reply" link under DoChen's post

infiniti's picture

The economy's health is a function of gasoline prices 12 to 16 weeks ago. 12 to 16 weeks ago, gas prices were at seasonal record highs. Hence, reported economic data is very sluggish in June and July, and this will probably continue into August. 12 to 16 weeks from now, reported economic data will be much better due to low gasoline prices today.

DosZap's picture

12 to 16 weeks from now, reported economic data will be much better due to low gasoline prices today.

Newsflash, gas prices are already going back UP.

q99x2's picture

V shaped recession.

Davalicious's picture

>V shaped recession.

L shaped structural down turn of western economies. There, fixed that for you.

midgetrannyporn's picture

The response by the fed and policy makers has been to try to get house, car, etc., sales back to the artifically high levels of previous years. They have made the situation worse with meddling. The new normal without constant stimulus and deficit spending is a much smaller economy. They will keep up the ruse of fighting it with trickle down tactics to no avail (other than the intended effect of an ever widening wealth gap). Without a strong value added manufacturing sector everything else is just fakery.

maximin thrax's picture

We don't have jobs programs in this country. We have production reduction programs. As production efficiencies and outsourcing increase, government puts more of us to work in the public sector and expands public assistance programs for others in order to scale the workforce down to the production needs of the economy. That keeps wages increasing (up until now, that is) even as the number of people needed to produce a given thing or service decreases. It also keeps social order.

We need leaders who gauge wealth by productive man-hours instead of how fast money can be created.

DosZap's picture

We don't have jobs programs in this country


Nope, but the Feds sure do.

Hiring 75,000 new agents to collect the mandate fees.

The Gov of Maine just called them the GESTAPO.

Winston Churchill's picture

Same as we don't have an unemployment problem.

Here in Florida we have an unemployable problem.

Have finally given up trying to employ Americans ,gone to legal

resident Guatemalians.Reliable,hard workers not drunks or junkies.

Caviar Emptor's picture

Do you really believe that the Bernanke Put is limited just to the stock market? 



"Throughout the last century the attachment of businessmen to free enterprise has weakened dramatically as they discovered they could demand--and receive--short-range advantages from the state. . . . I watched with incredulity as businessmen ran to the government in every crisis, whining for handouts or protection from the very competition that has made this system so productive."

-Former Treasury Secretary William E. Simon Record cash reserves that mushroomed during the worst recession in nearly a century? Ya


Snakeeyes's picture

The Monkey, I prepared a piece for Congress arguing again EXIM bank are just another taxpayer subsidized crony capitalist venture that should be closed down. But alas, too many in Congress love hog trough.

I am Jobe's picture

What happened ot rhe shovel ready jobs? O it is the weather which caused the delay.

Zero Govt's picture

the shovel is ready, problem is a spat in CONgress who can't agree wether Republicans should dig the holes and Democrats fill them back in, or vice versa

thefedisscam's picture

What a wonderful US system!

_ConanTheLibertarian_'s picture

depending on the desired outcome, they'll include the weather as a positive or a negative factor...

FXPortent's picture

Time to take out the good ol' plastic to keep the economy going!


3 cheers for more household debt! Because we need it for our recovery!

What are you waiting for?


Go out and BUY!

silverdragon's picture

The next decade in China will be a retail story.

asteroids's picture

"And then a miracle happens." This is the moment the FED has been waiting for. They zapped the markets (repeatedly) in hopes that it would magically fix the economy. Just like every other time since WWII. Well children, it won't. It can't. The base problems from 2009 still exist. Some better, some worse. In the end, too much debt, too much credit, and too much CDS. Someone is going to have to bust before we move on. China, Europe (singly or collectively), Japan, or the US. Pick the loser at the poker table.

1eyedman's picture

manufacturing hasnt recovered at all.   if something declines by 50%, it then takes a 100% upward change to get to the starting point.   if one draws a line between the zero level to the 

100 level on the y-axis and the 50 level on the x-axis it appears nothing has recovered to pre-'recession' levels.  GM/autos have recovered due to elimination of costs via bankruptcy and massive infusion of tax-payer-backed capital....but most importantly the resurrection of sub-prime auto lending thanks to the other bailout of GMAC aka Ally finaicial.   

there is a jackass here in sw fl who sells the kia brand, make abraod and shipped through canada to avoid fees and then sells purely based on the idea of getting everyone financed.

SoCalBusted's picture

" then sells purely based on the idea of getting everyone financed."

He is just playing by the "rules"