KEY DATA: ISM (Manufacturing): -3.2 points; Orders: -8.7 points; Employment: +1.9 points/Construction: -0.3%; Private Residential: +0.9%
IN A NUTSHELL: “Manufacturing’s robust growth rate has slowed to only a strong pace.”
WHAT IT MEANS: I hope everyone had a wonderful New Year. The manufacturing sector surged in the fall and it was likely that the robust pace would moderate. Well, it did in December. The Institute for Supply Management’s Manufacturing index dropped fairly sharply, but that hardly signals the sector is in trouble. First of all, the level is still consistent with solid growth. Indeed, it is hard to believe that firms ramped up hiring if they were worried that conditions were weakening significantly. Thus, the moderation in order growth, including imports and exports, as well as production doesn’t seem to be viewed with much alarm.
Construction activity eased in November, but here too the details are not pointing to a major slowdown. Private sector construction rose, especially for residential projects. That was really good news since this segment had been one of the weaker links. Nonresidential construction was off. The big drop was in public sector power projects. That may be reflective of the falling energy costs, though given the long lead times on these activities, it is unclear exactly what is happening.
MARKETS AND FED POLICY IMPLICATIONS: The economy continued to expand nicely at the end of last year but we will have to wait until next Friday to see how many jobs were created and a few more weeks to find out fast GDP grew. The early signs are that consumers spent money like crazy and manufacturing during the entire quarter was strong. Most economists expect that we will come down sharply from the 5% mountain that we got to in the third quarter. It is hard to think we will be anywhere near that number in the fourth quarter. But I still believe that barring a huge reduction in inventories, growth could once again be near if not above the 3.5% pace we have seen for four of the last five quarters. That is well above consensus. Still, for investors to remain exuberant, we need the data to show that the economy is hitting on all cylinders. Today’s numbers don’t show that, though they also don’t indicate a major slowdown. As for the Fed, the next FOMC meeting is January 27, 28. The members will know the December employment numbers but I am unsure how much they will know about fourth quarter growth, which is scheduled to be released on January 30th. Regardless, the “considerable time” phrase is being replaced by patience and the members have to start indicating what that means. I guess we will find out then, maybe.