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Fall in Manufacturing Output shows US is not immune from overseas weakness

Oct 02,2014  Market News  Comment: 0

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New York City, New York – (StockNewsDesk) – 10/02/2014 — US manufacturing hit a lull in September, slowing more than consensus estimates. The Institute for Supply Management (ISM) reported that manufacturing activity fell to 56.6 last month, the lowest reading since June.

Manufacturing Still Under Expansion

The US has seen somewhat of a renaissance in manufacturing in the last few years, as many companies have chosen to move or set up production domestically. There are a few reasons for this reversal of the decade-long trend of shifting manufacturing to locations where labor is cheap and environmental regulations, and taxes, are nonexistent.

The first is that costs are rising in all parts of the world, so there is less inconsistency between production costs in developing and developed nations. Second, much of manufacturing nowadays is done by high tech machinery, so there is less need for a massive amount of workers and more need for educated, sophisticated workers to operate, maintain, and fix the machinery. Furthermore, the US has a cheaper and more reliable source of energy because of cheap natural gas in many parts of the country.

The US is still the world’s largest consumer, by far, so it makes sense for factories to be near their customers. Due to these factors, and the continued expansion of the US economy, manufacturing continues to be in an expansion mode for over two years. In fact, August’s reading was the strongest since March 2011.

Concerns about Economy Slowing

For much of the last five years whenever the US economy looked to be on the verge of a self-sustaining run higher allowing the removal of monetary policy, some complication from overseas has emerged. Between 2010 and 2012, there was the tension of Greek default and worries about European default. In recent years, there have been geopolitical issues as well as a slowdown of the Chinese economy that has been a powerful headwind for global growth.

Some of these same issues seem to be resurfacing in recent months as most analysts are pointing to the chilly economic climate in China and Europe as culprits for the slowing growth in the US. These issues have also led to huge inflows into the US dollar, which hurts the manufacturer’s capacity to export their products. September was the first month where these factors have begun to dent the US economy’s trend.

Fall in U.S  Manufacturing Output

Impact on Financial Markets

There was a ton of weakness in financial markets as stocks fell almost 2% on the day, in the worst day of 2014. The ISM report was a contributing factor, as investors were spooked by the decelerating manufacturing numbers, suggesting the US is not immune from the overseas weakness. For much of this five-year bull market, stocks and bonds have risen on the back of disappointing economic weakness, as it would imply monetary easing for an extended period of time.

Now the Federal Reserve has been clear in its intent to end QE; the relationship between stocks and bonds and economic data has normalized. This miss on the ISM led to stocks falling and bonds rallying, as financial markets begin to normalize. on the back of disappointing economic weakness. Analysts have been warning that US factories could feel a chill from soft demand in the global economy and from recent strength in the dollar, and the ISM data can be taken as an indication for this.

Still, US factory growth remains historically strong and the wider economy shifted into a higher gear.

A separate report, from a major payroll processor, showed US private employers added over 200,000 jobs in the month of September, above expectations of economists.

The slowdown in US factory growth last month followed the August reading which was strongest since March 2011 for which few economists didn’t gave much importance to the September reading, although economist Ian Shepherdson believes that the readings of ISM are much stronger.

Separately, the Commerce Department said US construction spending lowered in the month of August 2014, hit by weaker private spending outside the housing sector and a pullback in public investments.

Construction spending dropped 0.8 percent to an annual rate of $960.96 billion. Economists polled by Reuter have earlier forecasted construction spending will be increased by 0.5 % in the month of August.

The surprise decline was largely because of a 1.4 percent drop in money spent on private nonresidential construction.

Private spending on housing fell by 0.1% last month, which cannot be relied upon as a sign of ongoing recovery in the housing market.

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