The Federal Reserve won’t be taking away the punch bowl in June — not if the recent mixed readings on the state of manufacturing are any indication of the health of the economy.
And those readings usually are.
The reason why markets and economists pay so much attention to factory activity, durable goods orders and purchasing managers indices is because even though services make up the great bulk of U.S. economic activity, slowdowns and recessions first show up in the manufacturing sector.
And so one of the great perversities of the Fed’s easy-money policy is that good economic news is bad news for stocks. The thinking goes that once the economy takes off, the central bank will start withdrawing the stimulus that has done so much to lift asset prices.
But tapering won’t be happening anytime soon if we get more news out of the manufacturing sector like we received Tuesday. Yes, the data were headed in the right direction, but still weren’t all that great.
For example: The Dallas Fed’s latest measure of regional factory activity soared last month.
But it was still negative.
And it missed expectations.
The headline index jumped to -10.6 from -15.6 a month ago, which is indeed a sharp acceleration. But analysts were looking for a reading of -10, and many of the sub-components remained weak.
True, the production index — a key measure of state manufacturing conditions — rose from -0.5 to 11.2, “indicating a notable pickup in output,” the Dallas Fed said in its media release. However, the regional Fed also noted that perceptions of broader business conditions continued to worsen in May and labor market indicators reflected weaker labor demand.
Meanwhile, the latest report out of the Richmond Fed also showed a big pickup in factory activity this month.
And it beat expectations!
But it still was negative.
The headline reading for regional manufacturing activity came in at -2 — a big improvement over April’s figure of -6 and well ahead of estimates for -4.
But in neither region are we seeing actual expansion. Things are simply getting less worse.
That’s important, for sure, since the trend is headed in the right direction. Activity has to get less worse before it actuality starts to grow again. But apart from a surprisingly strong report on durable goods orders at the end of last week, manufacturing has hardly been robust this month, at least going by the regional surveys. The improved readings are mostly still negative and the positive readings are barely so — and declining to boot.
The New York Fed’s Empire State index held onto positive territory by its fingernails, falling to 1.4 in May from 3.1 in April. The Philly Fed index dropped to -5.2 from 1.3 a month ago. The Kansas City Fed’s index turned positive, but again just barely, increasing to 2 from a prior-month reading of -5.
Furthermore, Markit’s May purchasing managers index (PMI) came in above 50 — indicating expansion — but likewise just by a hair. And at 51.3, it actually slipped a bit from April’s reading of 51.4.
We’ll get the Chicago PMI on Friday and — more importantly — the Institute for Supply Management’s national manufacturing survey on Monday. Markets and the Fed will be paying extra close attention. The ISM manufacturing index is forecast to come in at 51.1, down from a 51.3 in the prior month. Again: headed down, but still expanding, if only just a little bit.
The manufacturing data suggest the economy isn’t going anywhere in any hurry. And neither is the Fed’s punch bowl.