Mixed reports on US manufacturing today left traders guessing as to the direction of goods production, but careful analysis makes a strong case for optimism. US manufacturing businesses bounced off the bottom in October, the Markit survey of US purchasing managers indicates. The stronger-than-expected Markit numbers follow a surprisingly strong manufacturing report for China.
The Markit survey shows an uptick in November, despite continued weakness in the older (and more often cited) competing survey by the National Association of Purchasing Managers. Markit’s chief economist Chris Williamson wrote in a comment, “Chris Williamson, chief business economist at IHS Markit, said:
“A third consecutive monthly rise in the PMI indicates that US manufacturing continues to pull out of its soft patch. New orders and production are rising at the fastest rates since January, encouraging increasing numbers of firms to take on more workers. Exports are also back on a rising trend, firms are buying more inputs and re-building inventories, adding to the signs of improvement.”
That’s good news for President Trump, whose economic record is his strongest claim to re-election.
There’s good reason to believe the Markit numbers and ignore the NAPM data. The Markit data are more timely, and tend to lead the NAPM report. Past values of the Markit survey, that is, are highly correlated with present values of the NAPM survey.
The chart below shows the correlation of each month’s reading for the two surveys with the present level for the other survey. The blue lines show that past values of Markit are highly correlated with present values of NAPM – or in plain English, Markit leads NAPM.
Markit also claims to have a broader base of respondents. As the chart shows, it is far less volatile than NAPM, which tends to overshoot and undershoot.
Evidently there is pent-up demand for capital goods after a year in which corporations delayed investment decisions while they waited out the trade war. Most supply chains today are global, and it is hard for corporations to make decisions on investment if they are uncertain about where tariffs will hit.
This still isn’t a recovery. US manufacturing has fallen for three successive quarters. But today’s data encourage a cautious optimism about the sector. That’s a good reason to take profits in bonds after the 2018 plunge in yields. Bond yields are likely to move higher during the next few months.
Also read: China factory activity expands in November