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Investment Strategy

Portfolio Protectors

By Elliott H. Gue, on Dec. 10, 2015

For more than a year, consumer-facing and service industries have carried the US economy, while manufacturing activity and capital expenditures have weakened. Multinational companies have also taken a hit from the strong US dollar.

The Purchasing Managers Index (PMI) for US manufacturing industries slipped to 48.6 in November, the lowest reading since June 2009 and well below the Bloomberg consensus estimate of 50.5. PMI readings less than 50 indicate a contraction in manufacturing activity.

Digging into the components that make up this widely watched leading indicator reveals several causes for concern.

The new orders component tumbled to 48.9 in November, its lowest reading since August 2012. Weakness in new orders usually leads further downside in the manufacturing PMI, which doesn’t bode well for the economy heading into early 2016.

And the inventories component has tumbled for five consecutive months, reaching 43 in November. In the survey, most participating managers still described their customers’ inventories as elevated, suggesting the next few quarters could bring a drawdown of these stocks—another impediment to economic growth.

In October, the spread between manufacturing and non-manufacturing PMI had reached its widest point since December 2000. We called for slower growth on the service side of the economy to narrow this gap over the next six to nine months. (See A Tale of Two Economies.)

That’s exactly what happened in November: Non-manufacturing PMI plummeted to 55.9 from 59.1 in October. The Bloomberg consensus estimate had called for a modest decline to about 58.


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