U.S. Manufacturing Slumps Unexpectedly

In the past few weeks, we’ve heard a lot of good news from the U.S. This came in the form of positive jobs data and optimistic comments from Federal Reserve officials. But yesterday, we saw something different, as the country’s manufacturing PMI showed that the industry is contracting.

Amidst forecasts which called for a reading of 50.6, the ISM manufacturing PMI fell to 49.0 from 50.7 in May. Remember, 50 is the dividing line between growth and contraction. A reading above 50 means the industry is expanding while a reading below this means that it is shrinking. This marked the industry’s first contraction in six months and the steepest drop in four years.

According to the data, the reason behind the drop was… well, everyone. It showed that government budget cuts, weak corporate spending, and subdued global demand have all contributed to weakness in the manufacturing industry.

Below are some notable observation made by survey participants from different manufacturing subsectors:

  • Computer and Electronic Products: “Government spending has tightened, which has moved out program awards and caused some reduction in force.”
  • Fabricated Metal Products: “General economy seems sluggish and pensive. Buyers are not buying much beyond lead times.”
  • Electrical Equipment, Appliances & Components: “Market outlook is relatively flat.”
  • Machinery: “Downturn in European and Chinese markets is having a negative effect on our business.”

Not surprisingly, the disappointing report was not received well by the markets, who took their frustrations out on the dollar. The American currency posted sharp losses across the board, forcing many dollar pairs to break key levels.

USDX Chart

So does this mean we can kiss the Fed’s exit strategy goodbye? Not necessarily, buddy.
U.S. officials are already cautious about the threats stemming from too much quantitative easing (QE). The Federal Advisor Council, for instance, warned that the central bank’s bond purchases are creating bubbles in the fixed income and equity markets. Furthermore, the council determined that it’s not even “clear” if QE has been boosting the economy.

In fact, Ben Bernanke himself admits there are dangers involved in having an overly easy monetary policy. Just last month, he stated that the country’s record low interest rates, if kept for too long, could result in financial instability.

I guess what we should take away from all of this is that based on this report alone, we can’t rule out the possibility that the Fed will wind down its asset purchases soon. But it’s a whole different story if, the upcoming trade balance, ISM non-manufacturing PMI, and employment reports signal deteriorating economic conditions as well.

  • PipMeHappy

    Thank you for a very interesting article here…

    Certainly, it was the manufacturing industry that picked up the US economy in 2009-2010 out of the financial crisis, so even though the US is mainly a services (tertiary) economy, a low ISM reading was likely to have an impact… The problem with the US is that its bubble has pushed risk higher in return for ever smaller yields, with the security of a stable economy backed by its huge stimulus, leading to a difficult guessing game: will the QE3 tapering push the dollar higher or lower? The market had priced in the possibility of the tampering of easing and speculation that it would be voted in as early as June kept the Greenback on record highs; the possibility of the QE3 status quo ($85bn per month) remaining unchallenged could be the catalyst for either a move higher (as the Fed balance sheet provides the necessary safety net for investors) OR a move lower (as this signals a lack of confidence in the country’s economic growth).
    As John Kicklighter has signalled many times in his analysis of this situation (over at DailyFX.com), the split between the traditional role of the US as a safe haven currency and its more recent RISK-ON behaviour (nurtured by stimulus) has carried the Greeback into unchartered territory, where its upward run has been PARALLEL TO the S&P500 index… And if the USD is no AUD or NZD, then this shift away from its safe-haven role has meant a risky venture into a role as a different type of investment currency: the question is, how long could this last? It seems that with the return of growth (and the data backs a lowering of unemployment as a real and tangible sign of an economy on the mend) there would be a return to fundamental/traditional themes , away from the “stimulus wars” agenda, where the currency’s health reflects more closely its country’s growth and prosperity. If the latter were a tangible scenario, then the tapering of QE3, in combination with positive growth data ACROSS THE BOARD (ISM/NFP/Consumer Confidence/etc.), would certainly see the USD pick up again, but, this time, sustained by something more solid than the stimulus bubble.

  • PipMeHappy

    Here is a quote from today’s article on DailyFX:

    “US Dollar Correction May Extend on Supportive Fed Rhetoric

    By Ilya Spivak, Currency Strategist

    04 June 2013 10:52 GMT

    The US Dollar may extend an overnight recovery following yesterday’s sharp selloff as comments from Fed officials rekindle QE3 reduction expectations.

    Talking Points

    US Dollar May Bounce as Fed-speak Reboots QE Reduction Bets

    Aussie, NZ Dollars Correct Sharply Lower After Yesterday’s Gains

    The US Dollar mounted a spirited recovery in overnight trade, adding as much as 0.4 percent on average against its leading counterparts. The move appears to be a retracement in the context of yesterday’s aggressive selloff, which yielded the largest single-day decline in close to a year. This followed a dismal ISM Manufacturing print that weighed against Federal Reserve QE reduction bets, sending the greenback lower and offering a boost to risk appetite.

    Looking ahead, a quiet economic data docket in European and US trading hours puts the spotlight on scheduled commentary from Federal Reserve policymakers Esther George and Sarah Bloom Raskin. Both are current members of the rate-setting FOMC and traders will be keen to parse their commentary as expectations for a tapering of QE asset purchases continue to evolve. Between Ms. George and Ms. Bloom Raskin, the rhetoric on offer is likely to fall on the neutral-to-hawkish side of the policy spectrum. That may weigh on sentiment and further support the US unit. Technical positioning points to a broader bearish outlook however.”