Economic First Look: Focus on Manufacturing

 | Jan 14, 2012 | 8:00 AM EST
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  • Markets closed for Martin Luther King Jr. Day


  • Empire State Manufacturing Survey, 8:30 a.m. EST


  • Producer Price Index, 8:30 a.m. EST
  • Treasury International Capital, 9:00 a.m. EST
  • Industrial Production, 9:15 a.m. EST
  • Housing Market Index, 10:00 a.m. EST


  • Consumer Price Index, 8:30 a.m. EST
  • Housing Starts, 8:30 a.m. EST
  • Jobless Claims, 8:30 a.m. EST
  • Philadelphia Fed Survey, 10:00 a.m. EST
  • EIA Petroleum Status Report, 11:00 a.m. EST


  • Existing-Home Sales, 10:00 a.m. EST



This week is quite busy, perhaps not so much in the number of economic indicators, but rather how important many of them are in terms of their market impact. We have several housing metrics released (though you'll have to wait until the following week for the new-home sales report and the pending home sales index). We also have the producer price index and the consumer price index this week, and with import and export price data from this past Friday, that completes the trio of inflation gauges from the Bureau of Labor Statistics. And we have the dynamic duo of regional Fed surveys, the Empire State (from the New York Fed) and the Philadelphia Fed surveys. These, along with industrial production, will give us a sense of the health of the manufacturing sector.

All of these are important. Because of the market's strong, favorable reaction to the Institute for Supply Management (ISM) Manufacturing Survey when it was released on Jan. 3, however, I want to focus here on manufacturing. This week we will see if the ISM report, which is based on a survey that was conducted in December, is corroborated by the two Fed surveys, which were each conducted at the beginning of January.

Meanwhile, the industrial production report, which is compiled by the Fed, is as of December, and it is measured in hard dollars and actual production instead of sentiment and estimates, as opposed to the survey data we just discussed (whether it's the ISM or a regional Fed). Strength in this indicator might confirm the ISM report. Industrial production also includes utilities (which are weather sensitive) and mining (which includes oil and gas drilling), so I tend to focus on the manufacturing component separately than the other parts.

Given the timing of when the surveys were conducted, let's turn to the forward-looking elements of the ISM-Manufacturing Survey to see what we might expect to see from the Empire State and Philly Fed surveys. With the ISM, I tend to go straight to the new orders component. While it's possible that orders might get cancelled, this particular metric tells us a few things: one is how confident manufacturers' customers (wholesalers, retailers, construction firms, other manufacturers, etc.) are in their own order books to place the orders to their suppliers. It also tells us what production will be like in coming months. This, in turn, can tell us where business activity will be in the near future, both at manufacturers and the customers that purchase their products.

Some of these new orders, when filled, will go into inventories, which is where we can look at the customer inventories sentiment measure. When it is too low, retailers and wholesalers may have experienced, or might expect to see, an increase in sales. There's a lot in the ISM report, but today let's just take a look at these two metrics to start.

First, new orders climbed by 0.9 points to reach 57.6. Since any reading over 50 indicates expansion for this component, it means that manufacturers are not only seeing an increasing number of new orders; it means their new orders are growing at a faster pace. That acceleration is a good sign, as any reading over 50 would have still shown growth.

And customer inventory sentiment plunged to 42.5 from 50.0. That's actually a good thing. This means that customers now see their inventories as too low, when last month, they viewed them as about right. What does this mean, when we see, for example, that retail sales grew by (a perhaps disappointing) 0.4% in November and by a mere 0.1% in December (which was less than forecast, especially given Black Friday hype)? Remember that the retail sales report does not adjust for price changes. So, merchants could have seen gangbuster sales in volume terms on heavily discounted merchandise and now need to restock their inventories. In dollar terms, those sales may be less impressive -- and they may not have helped margins -- but those promotional events may have cleared out store shelves and warehouses. There were media reports of some retailers running out of some promotional items entirely.

So, when we get the Empire State and Philly Fed surveys this week, I want to see how these data from January correspond to the ISM data. The last Empire State survey showed impressive gains for both current conditions and forward-looking metrics. So, too, did the Philly Fed survey. The components within both surveys last month were fairly solid. And as I discussed in my column yesterday, I am actually bullish on the sector over the long term, perhaps not so much based on U.S. consumer demand but more from an emerging-market growth story perspective.

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