IHS Economist Sees Industrial Malaise

Lots of industry chatter right now about where the industrial market is headed. Michael Montgomery, U.S. economist for IHS Global Insight, Lexington, Mass., said in a recent IHS report that he has concerns about shrinking order backlogs and high inventories at U.S. manufacturers. Montgomery, who prepares the Electrical Price Index and Marketplace Key Figures each month for Electrical Marketing, had this to say in a press release:
“The ISM for manufacturing, the Purchasing Managers’ Index(PMI), sagged 0.1 point from 50.2 in September to 50.1 in October. Such a modest move means that the components exhibited crosscurrents. Production and orders were positives for the index, but employment and inventories were negative and a shade larger. Any strength in production and orders has a shadow cast over it by the fact that backlogs shrank for a fifth consecutive month and the seventh out of the last eight. Any strength in orders or manufacturing, and both measured 52.9 in October, is a one-time thing, with no momentum. Strength in orders and shipments plus rising backlogs means any strength has staying power.
“The respondents quoted in the ISM report correctly identified foreign trade (exports and imports) as a major drag. None of the quotes mentioned inventories ,which were the bane of the third-quarter GDP report. Inventory change accounted for 1.4 percentage points of drag on growth in the third quarter and disguised decent sales gains and produced weak gains in production. That drag will continue to haunt growth in the fourth quarter, although the degree of drag should moderate. The dollar has not been strong long enough for its drag on growth to end, as the strong dollar takes a long time to do its damage. Customers’ inventories were still too high in October, even if manufacturers’ inventories were falling fast — that means more output drag remains to come.
“That will mean the manufacturing sector still is staring down the barrel of mediocrity for more months to come. Revival from malaise will either require a spike in demand, a sharply weaker greenback, or time for the twin drags of foreign trade and too much inventories to fade. The first two are not likely. That means it will take time for manufacturing to heal, and that is more likely to be quarters rather than months. The twin problems besetting manufacturing could have been more painful but quick, but ended up as slow stagnation. This bandage is being yanked off very slowly.”

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