As much as the bulls might like to extend the recent rally in the major market indexes, the survey of purchasing managers released yesterday shows that the U.S. economy is sticking to the trend it has established over the past six months or so. That is, the consumer remains strong -- thanks in large part to discounting and other incentives -- but manufacturing and other key sectors of the economy continue to be weak.
Before the release of the report from the Institute for Supply Management (ISM) (formerly known as the National Association of Purchasing Managers or NAPM), the Dow Jones industrial average was well in the black -- based largely on the blockbuster results of the Thanksgiving shopping period in the United States. Following the ISM report, the index sank by more than 200 points, taking it from above 9,000 to below the 8,850 level.
According to a retail consulting firm, more than $7-billion (U.S.) worth of goods were sold on the Friday after Thanksgiving -- known in some circles as "Black Friday," because retailers that have been losing money all year can make it into the black on the holiday weekend. That was reportedly 12 per cent higher than Thanksgiving sales last year, which many took as a sign that the consumer is still going strong.
Some analysts, however, noted that the influx of holiday shoppers was driven in large part by widespread discounting, with some stores offering 80- or 90-per-cent off regular prices, two-for-one deals, "friends and family" programs and so on. Some retail chains are using the equivalent of the auto industry's zero-interest-rate financing, or the payment plans popularized by the Brick and Leon's Furniture, and allowing shoppers to avoid making any payments on their purchases for several months.
As for the ISM index, it was widely expected to come in over the 50-per-cent mark, a level that would have shown the U.S. manufacturing sector was growing. Instead, it came in at 49.2 per cent -- the third successive month in which the index fell below the 50-per-cent level, indicating that a significant portion of the U.S. economy is still soft.
To be fair, until last week the consensus estimate for the ISM was 49.5 per cent, close to what the index actually hit. Most economists and brokerage firms boosted their estimates after the Chicago-based version of the indicator came in much higher than expected, on the assumption that strength in the regional index was a sign of better things to come. The Chicago PMI hit 54.3 per cent, well above the consensus of 48.5.
Although many market watchers said the Chicago number had a fairly good track record of foreshadowing the national figure, it missed the mark by a wide margin this time. In fact, some economists warned even before the ISM survey was released that the Chicago report correlates with the ISM only about half the time, and that other regional surveys -- Milwaukee and Cincinnati -- were also below 50 per cent in November.
Many observers said the best thing about the Chicago reading was the fact that the "new orders" portion of the index jumped by a sizable amount to 60.8 -- a five-month high -- from 47.7 per cent in October, a sign that manufacturers were starting to pick up new business. This was taken by many economists as a welcome signal of a recovery in the manufacturing sector, the kind that the U.S. economy has been lacking.
In the national survey, however, the new orders index fell by one percentage point to 49.9, after being above 50 per cent in September and October. The employment segment of the national index was also troubling for some economy watchers. The employment index dropped to 43.8 per cent in November, down from 45 per cent in October -- the 26th consecutive month that that the employment subindex has been below the 50-per-cent mark. The production index rose to 54.6 per cent after falling below 50 in October, but the inventory subindex fell and was well below 50 per cent.
According to the ISM, "comments from purchasing and supply executives indicate that their business is either 'flat,' 'depressed' or in the 'doldrums' this month. The economy is holding up, ISM survey director Norbert Ore said, but "the manufacturing sector is feeling the brunt of the downturn. The decline in manufacturing employment is quickening. We are seeing a slowing in the rate of price increases. Over all, there are not really any signs of potential change either upward or downward."
The strong Chicago index may have convinced some economists to jump the gun on their expectations for national purchasing activity, but the ISM report shows that the U.S. economy continues to sputter along on one cylinder -- the ever-present consumer. Until there is some sustained pickup in manufacturing activity and in capital spending, the reality is that the United States will find it difficult to get out of first gear.