US Manufacturing - New Orders Switch to Growth

In terms of the state of manufacturing in a downturn, Caterpillar (CAT) had a striking quote in their last earnings call.

And generally speaking, if you go back to the '80s, close to half the world's manufacturers didn't make it through that downturn successfully. And the strongest got stronger, and we were one of those. I would expect that we will strengthen our position going through this downturn.”

The state of the ISM

The ISM's PMI hit some nasty lows in the 80's downturn, which were recently hit again in January during the current downturn, before seeing a rebound to the recent level of 42.8%, which still implies contraction, just less than before. Now, is the above Caterpillar quote correct, was it really almost half of manufacturers that ran into serious trouble? It would seem that this time around, things haven't been so bad. But feel free to enlighten me.

Interesting inflection point for New Orders

Most recently, if we look at the latest ISM report released June 1st, we see that there has been an interesting inflection point. New Orders growth went positive, continuing its improvement since December 2008, but rather shrinking by smaller amounts, it is now growing. Customer inventories have also continued a 2-month drop, which is a positive for future manufacturing orders.

While employment and inventories continue to decline at a rapid rate and the sector continued to contract during the month, there are signs of improvement. May is the first month of growth in the New Orders Index since November 2007, with nine of 18 industries reporting growth. New orders are considered a leading indicator, and the index has risen rapidly after bottoming at 23.1 percent in December 2008. Also, the Customers’ Inventories Index remained below 50 percent for the second consecutive month, offering encouragement that supply chains are starting to free themselves of excess inventories.

Anecdotal evidence

For some anecdotal evidence, here are some of ISM's quotes from different industries. I find the one from Machinery most interesting, implying that they might be last to rebound if indeed the US economy is starting to turn.

"Some amount of havoc is about to erupt, with companies pushing for increased capacity when suppliers have taken capacity offline." (Computer & Electronic Products)

"Business is actually better than plan." (Food, Beverage & Tobacco Products)

"Realistically, we don't see any of our major customers looking to place business until mid-2010 at the earliest." (Machinery)

"April was flat on sales. May looking better." (Primary Metals)

"Business still trending downward, but not as fast." (Chemical Products)

The strong will get stronger. The weak, well, will get weaker or die off (nonwithstanding bailouts of course)

Let's at the very least hope things don't unfold as they did in the 80's. Either way, as Caterpillar management said, strong players are likely to get (relatively) stronger in the current environment.