Fooled Again: The Upticks Never Last

The latest U.S. manufacturing PMI report shows once again how the market seizes on good news to make the case that the recovery is here…and then ignores the inevitable lack of follow-through. August’s preliminary manufacturing PMI printed a disappointing 52.1 (against expectations of 52.6). Weakness in Employment (lowest in 4 months) and New Orders underpinned the drop from 52.9 in July as a two month long bounce faded away.

These little bounces along the way have to be viewed in the context of the trend. We learned that back in junior high. Look at the chart of the monthly manufacturing PMIs going back three years…lower highs and lower lows. The trend is DOWN. Please don’t try to tell me that a one or two month bounce has any meaning.

US Manufacturing PMI - Aug 23-2016

Furthermore, the national PMI number is positively inflated compared to the regional Fed reports. Today we got the August results from the Richmond Fed’s manufacturing survey: it plunged to -11 (the lowest since January, 2013) hugely missing expectations of +6. The drop from July’s +10 to August’s -11 is the largest on record for data that goes all the way back to 1993.

Richmond Fed - Aug 23-2016

Weakness was across the board. New orders fell from +15 to -20, order backlogs and capacity utilization collapsed, and the average workweek slumped. Next month, if this indicator prints a higher number than -11, the market will once again cheer new evidence of a recovery. Will no one look at the TREND? The recovery hit its peak in 2011 and it’s been getting weaker since, even with the occasional bounce.