Steve Blitz Morning Notes

This morning's ISM reported that we are finally seeing outright expansion in manufacturing rather than contraction at a slower rate. Welcome news but be careful in broadening out the impact of this data too far. The sharp upturn in ISM New Orders does not mean positive growth in inventories and labor anytime soon. Overall labor and inventory rebuilding are much less impacted by new orders than they used to be. True, the cycle upturn in employment and inventory restocking duly follow new orders but the turn will be to less negative numbers not positive ones. This is the stuff of a milder recession not economic recovery.

The chart below plots inventories and new orders and clearly illustrates how inventory swings relative to new orders are much smaller than they used to be. The histograms plotted on the axis show that the average inventory number shows continual contraction while the new orders index average of just less than 60 is strongly expansionary. Firms on the whole have continued to shed inventory as part of the "just-in-time" process. The sharp drop in demand in this cycle proved out that manufacturers and retailers still had too much stock on their shelves. Looking forward, manufacturers are going to be extremely cautious in rebuilding inventories and the ISM Inventory Index is unlikely to move over 50 for a long to come. In the 1990s, in fact, it never did. I reiterate what was written in my past several blogs -- economic models basing 2nd half growth on inventory restocking will be overestimating the upturn.



I also have a chart comparing new orders to employment. Here we see that the upturn in manufacturing orders has meant less new jobs with each cycle. The smaller number of manufacturing employees has a lot to with the lessened impact of new orders on the overall jobs total. But there is also the point that, as with inventories, the sudden drop in demand left firms much more surplus labor than they thought -- and they will be cautious before adding back employees. Look for the pace of job shedding to abate and it will be several months more before the employment data indicate economic expansion.