Manufacturing Growth Is An Illusion Of Monetary Stimulus

This article originally appeared in the Daily Capitalist.


The following is a quick analysis of current data releases related to industrial production, both manufacturing and services. These numbers, especially manufacturing, are key indicators of the health of the economy.

The services industry, which accounts for about 90% of the U.S. economy, continued to slide in June, according to the latest ISM report. The Index slipped 1.3 points to 53.3. Rather than spending a thousand words on this, here is the picture:

Since the Index peaked in March of this year, the last four months have declined.

On the manufacturing side, factory orders for May, were more positive, but still not showing strong growth:

According to the Census Bureau:

New orders for manufactured goods in May, up two of the last three months, increased $3.5 billion or 0.8 percent to $445.3 billion ... This followed a 0.9 percent April decrease. Excluding  transportation, new orders increased 0.2 percent. Shipments, up eight of the last nine months, increased $0.4 billion or 0.1 percent to $443.9 billion. This followed a 0.4 percent April decrease. Unfilled orders, up thirteen of the last fourteen months, increased $7.7 billion or 0.9 percent to $860.9 billion. This followed a 0.6 percent April increase. The unfilled orders-to-shipments ratio was 6.12, up from 6.11 in April. Inventories, up nineteen of the last twenty months, increased $4.5 billion or 0.8 percent to $593.0 billion. This was at the highest level since the series was first published on a NAICS basis in 1992 and followed a 1.5 percent April increase. The inventories-to-shipments ratio was 1.34, up from 1.33 in April.

This data is consistent with the Chicago PMI (up 4.5 points) but that must be considered with the N.Y. and Philadelphia May manufacturing reports:

Durable goods orders have been weak:

Which means that while there are some brighter spots, on the whole, industrial output is still rather weak:

 I put a lot of emphasis on the manufacturing sector, because I believe capital investment in manufacturing is what will lead the economy out of a recession. At this point I see a lot of manufacturing improvement but ... whether it is a result of real organic capital formation to expand production or mostly as a result of a cheap dollar which favors exporters is important. At this point I believe manufacturing growth is from a cheap dollar, which would explain weak industrial production as a whole.

One of the interesting things in the just released manufacturing report is that computers as a category declined 3.1% in May, reflecting a trend since Q1 2011. If there has been one thing that has driven real organic growth in the past two years, it has been corporate spending on technology to achieve greater efficiencies. As we have seen, it has been efficiencies, not demand, that have been behind the growth of corporate profits (other than for multinational exporters). Whereas the fact that machinery such as construction equipment, mining equipment, and power generating turbines and the like grew 2% in May, activities that are not especially strong in the U.S., would tend to support the cheap dollar-export thesis.

This chart shows computer shipments as an historical trend:


You can see a strong expansion beginning in Q1 2009 and then declining in Q1 2011. If computer related equipment manufacturing is dropping off, then I would say the drive for efficiencies is done, and until demand picks up, manufacturing, as well as services will continue to stagnate. 

It is too soon to call a definite trend with these numbers.

My bet is that manufacturing is stagnating because of a lack of "real" investment. Which means manufacturing growth is not so organic as it is export related, which is entirely based on the "advantage" of a cheap dollar. This would help explain why industrial production is declining.