by Jeff Reeves | August 23, 2012 3:42 pm
There’s a lot of wonky data out there for folks watching the manufacturing sector, but a few recent PMI releases — that’s “purchasing managers index” for those unfamiliar — tell the simplest story.
Unfortunately, that story is a little bit of a horror show.
You see, purchasing managers matter because they are the ones at the beginning of the supply chain for manufacturers. A PMI reading is based on five major indicators: new orders, inventory levels, production, supplier deliveries and employment. Collectively, they make up a reading of 1 to 100 that is simple to interpret — 50 is flat, 51 or above signals growth, and 49 or lower signals a contraction.
PMI reports are important not just for manufacturing stocks like General Motors (NYSE:GM) or Boeing (NYSE:BA) or Caterpillar (NYSE:CAT). They also are important as gauges of broader economic strength. After all, this is just the beginning of the manufacturing cycle, and it’s logical to take the PMI numbers and then extrapolate down through the business and consumer cycle, from raw materials to point of sale in retailers.
So, how is global manufacturing doing these days, based on PMI? Take a look at a number of key regions:
After a nine-moth low in July for its flash PMI from HSBC, the actual July PMI numbers improved slightly … but still signal decline, with a final reading of 49.3. Now the flash PMI for August is once again ugly, at 47.8. The long-term trend is clearly down, too. (Graphic courtesy Mish’s Global Economic Trend Analysis.)
You should know how ugly things are in regions like Spain, but the “strong” European nations of France and Germany are struggling and haven’t seen manufacturing growth for months. The eurozone’s flash PMI for August was negative for the seventh straight month with a dismal reading of 46.6. But hey, that’s an improvement from 46.5 in July! Market watchers are calling for a “technical recession” in the region (that’s two quarters of GDP contraction) as a result.
As the pithy Brits over at Alphaville wrote, “Look! Even if the eurozone as a whole managed to not err … contract even more … and pretend that blue line doesn’t exist. It’s only Germany at a 38-month low.”
There is a ray of hope here in that America saw a slight rise in its PMI flash for August and the reading remains positive at 51.9. However, it’s the second-lowest reading in 35 months, and strength from this spring has all but evaporated. More concerning is that in the details, employment increased at its slowest pace in about two years — so even if manufacturing is improving in the U.S., the job market is not.
As Markit Economics writes in the report, “Employment in the manufacturing sector rose further in August, but the rate of job creation slowed for the fifth month running to the weakest since December 2010.”
It all adds up to a rather ugly state of manufacturing right now, so take care before investing in any of these stocks.
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at email@example.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.
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