American Manufacturing Doldrums in a Joe Biden Economy

Peter's Market Rap for Week Ending March 8, 2024

 American Manufacturing Doldrums in a Joe Biden Economy

Hey. Peter Navarro here with this week’s market wrap for the week ending March 8, 2024; and it was another up week for the S&P 500 after some midweek blues.  Yet, there is also a deeper story to tell in the data.

But before I tell that story, I want to do a little reminiscing – it is germane to the topic before us – about my early days honing my skills as a macro economic forecaster.  Back in the day, I figured out that the gross domestic product of any country is driven by only four engines – consumption, investment, government spending, and so-called “net exports,” which is the difference between how much a country exports and how much it imports.

Big note here: when a country imports more than it exports, that is, runs a trade deficit, that negative net exports problem shaves points off the GDP growth rate. That’s one of the many reasons why trade deficits are bad no matter what the free traders on Wall Street tell you.

At any rate, if you want to be your own economic forecaster, all you have to do is figure out what are the best leading economic indicators are of each of the four drivers in the GDP growth equation – again, consumption, investment, government spending, and net exports.

And here’s another teaching point: there are three kinds of economic indicators – leading, lagging, and coincident.

A lagging indicator is pretty much useless for forecasting because it only shows what’s happening after the fact. You may be surprised to know here that, for example, the unemployment rate is a lagging indicator. But that does make sense because companies don’t usually lay off people until after the slowdowns begin to occur.

Coincident indicators track directly with the business cycle and likewise are not very useful for forecasting purposes. Industrial production and retail sales are both coincident indicators because they give you a snapshot of current economic activity.

As for the leading economic indicators, these are the forecaster’s playground. For example, for consumption, a key leading economic indicator is consumer confidence – if confidence is rising, people are more likely to start spending more, and that will show up as growth down the road.

As for investment, this is where our topic for the day comes into play. The hands down best leading economic indicator of investment is the ISM Manufacturing index a.k.a. purchasing managers index.

The ISM manufacturing index provides insights into the state of the U.S. economy by surveying purchasing managers at over 300 manufacturing firms on parameters ranging from new orders and production to employment, supplier deliveries, and inventories. All that data is packaged into a so-called diffusion index that ranges from 0 to 100; and the punchline here is that any number above 50 indicates that the economy is expanding but any number below 50 warns of contraction.

Now a drumroll please as I share with you the latest news about the ISM index from the Institute of Supply Management, which publishes the index once a month in the first week of the month. Let’s let the Chair of the Institute tell it, Timothy Fiore:

The U.S. manufacturing sector contracted in February, as the Manufacturing PMI (ISM) registered 47.8 percent, down 1.3 percentage points compared to January's reading of 49.1 percent. Said Fiore: "This is the 16th consecutive month of contraction. Four out of five subindexes that directly factor into the Manufacturing PMI are in contraction territory, up from three in January. The New Orders Index dropped back into contraction territory after one month in expansion. 

I would be remiss here in not pointing out that Mr. Fiore managed to offer a positive spin on all of this. Surveys of various panelists reflected sentiment about improving demand, a trend that began in December 2023.  In addition, indications of order softness were at the lowest level since April 2023.

Still, raw materials prices increased in February for the second month in a row after eight consecutive months of decreases. That may be a canary in the coal mine of the reignition of inflation should the economy begin a more robust expansion. Part of the problem is demand pressures but those pesky supply-chain shortages are still very much in evidence.

At any rate, if you are interested in becoming your own economic forecaster to get a leg up on things for your job or investing, you may want to keep your eye on the ISM manufacturing index. It has had one of its longest stretches of misery during the Biden regime even as Joe Biden continues to try to claim is a friend of the working blue-collar man. It’s just not showing up in the data.

To learn more about macroeconomics forecasting, as a PAID subscriber to my subscribe, you can take my online macro course for FREE.  Just click on the link below for access — and if online learning is not your cup of tea, you can share the gift with a friend or son or daughter or grandson or grand daughter that may find it useful.  (Only 80 redemptions left for the month).