Manufacturing Signals a Slowdown?

The data this week so far has been sparse, and in the context of our fragile economy it can be worrisome not to see a constant flow of statistics confirming our growth path. People like me tend to get concerned about downside risks and so fret in the absence of rosy information.

Take today’s Manufacturing ISM report.

This is a measure of activity in our factories and has been in a growth pattern for a few months. But it stalled in November. It dropped from October’s 55.7% to 53.6%. Not a huge drop I admit, but a worrying one. Ant reading on this index over the 50% mark indicates that the economy is growing, so November’s figure still supports the view we are out of recession. The problem is that the pace of recovery seems to be slipping already.Worse yet is the labor component of the overall index: it slipped to just 50.8% which is barely expansionary.

Clearly we are not out of the woods yet.

I realize this is repetitious, but the issue is that most of the recovery has been fueled by the combination of inventory correction and the government stimulus. It was the inventory re-stocking that spurred the original uptick in manufacturing. What today’s news suggests is that the adjustment has been completed and that any further growth in factory activity will have to come from an increase in demand.

And there is little or no evidence of such an increase.

So, with the impact of the stimulus also beginning to fade – in growth terms it has already had its biggest impact – we are all now waiting for the basic economy to show signs of life. Those signs are there, but are weak. Today’s news makes me wonder whether they will get weaker still. Given how close we remain to the edge, any further weakening could be sufficient to push us back into recession.

Few people are forecasting a ‘double dip’ recession, but the odds are increasing not diminishing.

And that has me worried.