U.S. Recession on the Horizon? The Manufacturing Indicator Tells You!

“Made in America” is a slogan often heard in recent years and is indeed a change in manufacturing - U.S. companies are moving manufacturing from Asia back to the United States.

Manufacturing is the core element of economic growth, so how to analyze it?

Next, this course takes you to focus on how the manufacturing industry is connected with the economy and investment!

● Why is manufacturing so important? What are the indicators?

● How do investors observe and establish an analytical framework?

● What is the impact of manufacturing on the stock market?

● Then let's fight it!

● Small knot

Manufacturing is an important component of US economic growth. In simple terms, there is no production, where is the consumption?

Therefore, the upward production data is often a “leading indicator”. Being able to understand the trend of the economy can be said to be the most important!

Because it is valued enough, the United States will often put out relevant policies.

In recent years, the US has been using policy support methods such as tax, subsidies and regulation to attract manufacturing, especially semiconductors and electric vehicles. For example, the Chip Act 2022, the government allocated $52.7 billion to companies building factories in the United States.

President Biden has put “support for American manufacturers” at the heart of his economic policy and is expected to be a key part of his campaign for re-election.

Therefore, the market most concerned about indicators are:

1. PMI

2. New Order for Durable Goods

3. stockpiles

Here, we made a brief summary of the indicators involved in this course. The following will explain what these three indicators are.

1. Manufacturing PMI

PMI's full name is Purchasing Managers' Index, PMI. Its importance can give five stars!

One of the three stars stems from which it isThe first macroeconomic data released in a month.

The remaining two to its “function”: PMI can monitor the manufacturing industry's climate, predict the US economic trend, so it is hailed“Barometer” for macroeconomic.

It sounds like PMI is very powerful. What does this index consist of?

Purchasing manager index, as the name implies, is filled in by the purchasing manager of the manufacturing enterprise as the market conditionquestionnaireBraided.

What's on the questionnaire? Mainly divided into five categories of questions:New orders, production, practitioners, supplier delivery times and inventory.

Markit PMI or ISM PMI?

The table shows that there are two major US PMI data, from ISM and Markit. Which one of these two looks better?

Long story short,Authoritative Look ISM, Accuracy Look Markit.

The two PMI data are more consistent in both publication time and calculation methods, and the differences focus on sampling and survey methods, and sub-weighting. As ISM is more authoritative, the market is more focused on PMI indices released by ISM. But when ISM diverged with Markit's PMI, some investors considered Markit's manufacturing trends to be more accurate.

After understanding the basic structure of PMI, how to analyze it after getting the indicators?

The analysis method is directly related to the questions in the survey.

Purchasing managers believe that there are three options for manufacturing climate: increased, no change, and facing deterioration.

These three give weights to 1, 0.5, and 0, respectively, therefore,50% represents the level of prosperity of the manufacturing industry.

It means,When PMI is greater than 50%, we can think that the manufacturing climate has increased. Similarly, when the value is less than 50%, it can be considered to have worsened.

Because of the way it is calculated,PMI only has the ring data, no data.. When we go to the analysis, it's moreWith reference to the current data and the previous period, the change from 50% of the line, and market expectations.

For example, the PMI reading in February was 49%, but rose by 1 percentage point from January and better than market expectations, we can think that the economy is not in the range of expansion, but is getting better.

2. New Order for Durable Goods

Next, we will talk about a leading indicator of manufacturing - new durable goods orders.

Because goods take time to manufacture and deliver, an increase in order will lead to increased production; a drop in order will increase inventory and eventually lead to a drop in production. So economists use durable data to predict changes in manufacturing.

Why “durable goods” instead of “non-durable goods”?

Let's first look at the difference between these two definitions.

● Durable goods are items that are planned to use for three years or more, such as motor vehicles and electrical appliances, which do not require frequent ordering.

● In contrast to durable goods, non-durable goods naturally refer to goods with shorter lifespan, faster manufacturing and delivery times, and cheaper.

The main reason for not using non-durable goods is,If the economy is bad and income is limited, families can postpone durable goods orders but still consume non-durable goods.

So, how to analyze this indicator of new orders for durable goods?

For example, Xiao Ming's family wants to buy a luxury car, where does the money come from?

1. deposits

2. loans

Whether it is a deposit or a loan, they are free to spend at Siu Ming. Therefore,Durable goods data indicate the willingness to spend and loan, economic good will be high and vice versa.

The data on new durable goods orders issued by the U.S. Department of Commerce is very volatile. If the data is difficult to predict, the market usually has two ways to analyze:

1. With a year growth

2. Used by excluding defense and shipping orders and analyzing three to six month moving averages

If durable goods order data continues to rise, then it meansBuyers or investors: The US economy is optimistic.

3. stockpiles

Finished two leading indicators，Now for a lag indicator - inventory。

Why lag it? Because it is difficult for companies to fully match inventory to future needs. Usually there is a demand enterprise plus code production, thus forming inventory.

So, what is the use of analyzing inventory?

The “lag” of inventory is only in terms of relative demand, and for the economy, analysis of inventory canHelp find the early signs of an economic inflection point.

When there is a recession, demand goes down, and the manufacturing industry will experience a large backlog, so businesses will cut orders to try to drop inventory. These actions aggravate the recession and form a vicious cycle.

And when economic recovery occurs, demand rises, and businesses start replenishment with increased orders, which will stimulate demand and inflation.

Analysts like to use the “inventory to sales ratio” to observe the position of inventory.

The chart below can be seen visually that inventory sales have changed significantly more than all during the three US recession.

Having said so much, how does analyzing manufacturing help investment?

In short, understanding manufacturing can help investors uncover potential investment opportunities, as policy support and manufacturing data will be reflected in the manufacturing enterprise share price.

The level of activity in the manufacturing industry is usually cyclical fluctuations, which means that when the economy is booming, manufacturing production certainly will not be low, and vice versa. Investors can adjust their portfolio accordingly in combination with the current economy.

For example, if investors notice a significant boost in manufacturing orders and production in a particular sector, it is likely to mean that the company's business is growing, then it may be a good time to buy stocks or funds in that sector.

The same is true for analysis from an inventory perspective.

High inventory levels over a sustained period of time may indicate weak consumer demand, and in order to cope with excessive inventory, manufacturers must stop or decrease production.

This is called “going to inventory” in economics.

But reducing production will lead to a decrease in corporate profits, so the share price of manufacturing companies may fall.

The PMI reading for ISM in May 2023 was 46.9%, down 0.2 percentage points from 47.1% in April; the market is expected to be 47.0%.

How to interpret it?

1. Remember, 50% as a “dead line”, greater than 50% is an optimistic economic outlook, and less than 50% as a pessimistic economic outlook.

2. May readings remained less than 50%, and the overall curve continued to show a downward trend. As a result, the downturn in manufacturing may point to a slowdown in the economy as a whole.

3. PMI below market expectations also led to a decline in the stock market after launch.

This course ends here, and the analysis of the manufacturing industry has summarized the following steps:

1. Pay attention to the news whether to issue manufacturing related policies, you can pay attention to the relevant industry investment opportunities or risks;

2. Understand the release time and market expectations of important manufacturing indicators, risk management of investments can be carried out before the indicator is released;

3. Track manufacturing PMI and grasp the future economic climate;

4. Observe the changes in orders, inventory and other indicators to determine the current economic operation;

5. Combining the above, adjust the portfolio accordingly.

Written at the end

If you have learned how to analyze manufacturing from this course, you may wish to pay attention to the “Advanced” section of our macro interpretation to see the latest PMI data to predict market trends!