Manufacturing (NAPMPMI) in the U.S. unexpectedly shrank in May at the fastest pace in four years, showing slowdowns in business and government spending are holding back the world's largest economy.
The Institute for Supply Management's factory index fell to 49, the lowest reading since June 2009, from the prior month's 50.7, the Tempe, Arizona-based group's report showed today. Fifty is the dividing line between growth and contraction. The median forecast of 81 economists surveyed by Bloomberg was 51.
Across-the-board federal budget cuts and overseas markets that are struggling to rebound will probably continue to curb manufacturing, which accounts for about 12 percent of the economy. At the same time, demand for automobiles, gains inresidential construction and lean inventories may spark a pickup in orders and production in the second half of the year.
"Manufacturing is really stymied by slow corporate spending and government spending cutbacks," said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, who was the only analyst in the Bloomberg survey to correctly project the drop in the index. "Manufacturing will grow at a modest pace this year" although it "is unlikely to accelerate in coming months," LeBas said. "This is part of the slower expansion we'll have in the second quarter."
David Fuller's view A statistic often repeated on this site:
historically, it has taken at least 5 to 7 years, on average, for a developed
economy to recover from a credit crisis recession. If we take the end of 2008
as the approximate nadir for the USA's economic contraction, we have commenced
the 6th month of the 5th year during this process.
Of course, Wall Street and most other stock markets have done considerably better, helped by improving corporate governance reflected by stronger balance sheets and increasing profits, slightly stronger global GDP growth, and very accommodative monetary policies, not least from quantitative easing (QE).
Historically, stock markets often do best when corporate profits are increasing against a background of modest economic recovery and supportive monetary policies. However, Wall Street is no longer cheap with the S&P 500 Index (historic, weekly & daily) trading on a current PER of 16.01 and current Yield of 2.07%, according to Bloomberg.
It has been in a small corrective phase since the key day reversal on 22nd May. This is the 4th similar sized reaction since the important low in November 2012. However, the valuations have moved higher over the last six months and the S&P is also more overextended relative to its 200-day MA. Therefore, the chances of a somewhat larger pullback are increasing.
Meanwhile, in line with bull market psychology, Wall Street soon shrugged off today's 'surprise' weakness in manufacturing, because it may have pushed backward the date for a reduction in the amount of QE, currently running at $85bn per month. However, we can probably assume that this figure has more downward than upward scope in the months ahead.