A Dose of Reality
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Survey Shows Pullback in Demand: After a couple of months of solid
improvement across the industrial economy, it looks like momentum may
have slowed, and in some cases reversed direction altogether. Nowhere is
this more apparent than in auto sales – which plummeted 27% in September
after a bounce of 3% in the month of August
While this is clearly a function of the aftermath of clunkers, our survey also
showed a similar pattern of growth and subsequent pullback for the
Architectural Billings Index and Dodge Construction data – both leading
indicators of non-residential construction activity. We also note that two
broader, macro indicators, durable goods orders and Chicago PMI, both
recently retreated from sharp bounces in the previous month.
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Are we headed for a double dip? We don’t think so. Rather, we would say
that this is reflective of the fact that we are in for a long, slow economic
recovery. Conditions are not necessarily getting worse, but it seems that
investors need a dose of reality – particularly after the slew of fairly strong
positive economic data we saw in July and August. Indeed, though the
above factors worsened, our survey also shows that housing, auto and steel
production and inventories are still on an upward trajectory, and that retail
sales improved for the first time.
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Positive Signs Overseas: Despite the not-so-encouraging data outlined
above, the recent China PMI reading holds promise. Specifically, the new
export orders component of the PMI index caught our attention as it jumped
1.2 points in September to 53.3. Though the index is heavily weighted
toward the industrial sectors (Exhibit 1), channel checks done by our China
Economics team indicate that exporting manufacturers have seen a pick up
in rush export orders by U.S. and European retailers in an attempt to restock
depleted inventories (see text for more detail).