SCHAUMBURG – There were two important manufacturing industry reports last week – one said manufacturing was stalling while the other indicated growth. The two different reports set the stock market into a short term downward spiral – but one that is likely to be not so bad.
The PMI showed an industry contraction while the Markit Index showed things looking up for the second consecutive month.
The Purchasing Managers Index, or PMI, is a survey of manufacturing businesses across the country. It came in at 47.8 for September, the worst number since June 2009 and the second straight result below 50—which indicates contraction. Contraction is bad enough, but what the market really hates is a negative surprise. Wall Street’s expectation for the September PMI was 50, so 47.8 qualifies as a big miss. The gap is what is driving investors’ data doubt…
… The ISM PMI report is a survey of 800 businesses. Manufacturers across 18 industries answer if things are getting better, worse, or staying the same for several areas of business, such as hiring, sales, orders, pricing, and inventories. One business gets one vote—results aren’t weighted by size. That’s why the PMI is called a diffusion index with a base value of 50—a level that means an equal number of respondents reported better or worse conditions.
“ISM tends to show more cyclical amplitude and therefore [can] be weaker than [other indexes] in the periods of genuinely soft growth,” wrote Deutsche Bank chief investment strategist Alan Ruskin in a Wednesday research report.
But the Markit numbers showed something different.
“The [Markit] global manufacturing PMI was up in September for the second consecutive month,” Ruskin said in the report. Based on Markit data, he believes the global manufacturing downtrend has paused.
The Markit index is also calculated differently than the ISM number. “ISM weakness has been largely driven by trade war-driven uncertainty, and [U.S. dollar] strength,” writes Cornerstone strategist Nancy Lazar in a Wednesday research report. “The Markit PMI, constructed differently with a more domestic U.S. focus, and is less sensitive to foreign activity [and] the dollar.” The U.S. dollar hit fresh 52-week highs late in September.
So, what exactly is going on with manufacturing? It’s going through a valley, but it may not be as deep as some predicted.
Even though there is conflicting data, the fact remains that U.S. manufacturing is in a downtrend. Lower interest rates and an end to the U.S.-China `trade conflict would help the manufacturing sector. The sector’s problems are real, but at least investors can take a little comfort in the fact that things might not be quite as bad as feared.
The rest is HERE on Barron’s.
