Manufacturing activity a blip or more serious

/Manufacturing activity a blip or more serious

Manufacturing activity a blip or more serious

The February 3rd report in the WSJ outlined continued decline in manufacturing activity in the US provided an insight into an economic slowdown.  It is not surprising to see the slowdown in manufacturing based upon GDP data that indicates inventory build has been a major contributor to GDP over the last few quarters. 

What is concerning is a reading above 50 indicates expansion so the manufacturing sector is still expanding but the decline in January from 56.5 to 51.3 should put up some yellow lights.  This is the largest one month drop since May of 2011.  The new order index is down substantially creating concern about the coming months.

Summary of Manufacturing data for January

Index

One month
change

Manufacturing activity

51.3

-5.2

New Orders

51.2

-13.2

Production

54.8

-6.9

employment

52.3

-3.5

 

This news is combined with downward pricing pressure being experienced across the board.  Every new technology product is cheaper and faster than the last.  Some major companies such as GE, Kimberly-Clark Corp. and Royal Caribbean Cruise Lines saw significant margin erosion because of intense competition on weaker demand.  Consumers appear to want a deal to spend.  These same discounts hit McDonald’s and Starbucks operating results.  As public companies endeavoring to keep shareholders happy with ever increasing revenue amid stiff competition weighs on profits and cash flow. 

Kimberly- Clark wanted to be competitive on the shelf with private labels creating pricing pressure to maintain market share.  What I found startling is that the company is going to reduce the  number of diapers in a box to remain price competitive.  The consumer is not unaware and I question the tactic. 

The cruise industry has added a number of floating hotels over the last decade creating substantial supply.  They must fill the rooms as the fixed cost to run the vessel is substantial.  The casinos and bars cannot generate revenue and profits unless the ship has ample customers aboard.  So they cut prices to win customers and in some cases motivate the consumer to spend on the vacation.  Any way you cut it the revenue and profit line will suffer as will cash flow.  They all are linked. 

Pricing pressure from abroad was discussed as several manufacturers faced pressure from international suppliers.  The international suppliers need to move inventory so they cut prices to sell goods in the United States.  This puts additional pressure on US manufacturers but the consumer wins. 

On the international front it was surprising to see a severe decline in manufacturing activity in China.  The following graph is from the WSJ.

Manufacturing activity in China


Is the January downward trend in China’s manufacturing activity a blip or more serious.

China appears to be finally taking a big breath from years of expansion.  Let’s see how this all rolls out in the months to come.

Our economy continues to expand however so slowly.  Banks are healthier and willing to lend to companies.  Today’s WSJ indicated that consumer lending continues with tight credit standards limiting the consumers’ ability to spend.  Home sales continue to move forward and consumers’ are spending on their homes.  We will have to wait and see on mortgage rates as the Fed reduces bond buying.

 

By | 2017-03-06T12:04:51-04:00 February 5th, 2014|business advisory|0 Comments

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