The Week in Review - US

US results this week were mildly supportive of desk anchors; nothing spectacular.

All we can do for a client is provide a better view of economic reality ahead than that provided by street “consensus.” That is, isolate the flaw often generated by group decision making. In such a way the client can capture price change. For example, if we know that jobs-related activity will flatten estimates, the exact print doesn’t matter, simply the direction of miss.  We work in the reverse of most strategists and it generally has proven effective, past years. But the sweet spot can prove elusive; one is not always in ownership of good insight; it cannot be forced.  Let’s take a look.

Our key desk anchor, Q1, has been jobs creation.  This has held perfectly past many weeks, yet Thursday’s Claims print was not quite as low as expected. A trend? No. Ongoing look for more strength from this key sector.

This leads us to today’s Feb Personal Income and Outlays data. Income was up modestly but spending blew through estimates, putting consumption for Q1 at about a 2% increase. How can this be? The mystery plaguing most economist has been why the disconnect?  Jobs creation had flattened their forecasts yet incomes have lagged and so they have under-estimated consumer activity.

Key is attitude. Models don’t account for it. The US consumer is sick of hearing of the antics of the clowns in the E-Z or the China “hard landing” just around the next corner. This stuff used to register; no longer.  But signs of domestic employment vigor have a very positive impact on attitude, for both the employed and of course, those on the hunt (and a mild winter hasn’t hurt either).

This explained the strong Feb Retail Sales print (Mar/13) and it explains today’s Outlays print. Recall that for Feb Sales, energy prices were not the whole story; there was plenty of spending elsewhere and not just for vehicles, and, in spite of higher gasoline.  Without the recent spike in gasoline prices we would have seen Core Retail Sales ex-gasoline at perhaps +0.9% instead of the +0.6% print.

Barring much higher crude, US consumers will remain the world’s #1 engine right through 2012. Until earned income catches up, they will borrow the difference. 

Not all is rosy however. We saw the Feb Durables read on Wednesday; it was an improvement from Jan but nothing robust. And that key component – Nondefense capital goods shipments – the proxy for capital spending, is little changed from Q4 levels.

And today’s Chicago ISM, a good leading indicator, was not quite as strong as expected. We instructed in the Week Ahead that this read carries good leading hrsp, especially new orders and employment. New orders declined a tad, yet at the present level still suggest a growing demand for factory products. Backlogs actually increased, suggesting that factory activity will continue to grow over the intermediate term; just nothing spectacular. Finally, employment declined a tad, but then again, that was from its highest level since April 1984. So not bad. We had removed manufacturing as an anchor; we knew it would continue to grow, just nothing not already priced in.  Today’s data fit that view.


Robert Craven

Germany, UK - An Update

We cautioned that German results this week would disappoint. Instead, Monday’s IFo survey (business climate, current assessment and expectations) came just a hair through consensus for modest improvement; modest perhaps, but world markets went bonkers.

The market crowd is in the process of cherry picking that which fits their bias. Not however IFo president Hans-Werner Sinn, who said just after the release of his survey that the data are a sign that the German economy is “losing some of its momentum.” He went on, “The improvement in expectations was smaller and the business situation did not show any further improvement.”

Doesn’t sound like a drum roll to us.  Of course how would Sinn know?  He only runs the thing!

We also noted that it is best to be relatively constructive on the UK; nothing strong naturally, just something more than economists on the whole expect. We knew that last week’s poor Feb Retail Sales print delivered a mind set to analysts, a rush to revise. That is why in our Week Ahead we noted that any “surprises” this week for the UK would be to the side of strength. Today’s Mar CBI retail survey was a fit, at 0.0 vs -6.0, consensus. That’s simply the way it works with this crowd.

Of course well-know retardants remain – gov’t, bank and household deleveraging. But all three were long ago priced in. And, all three are getting their acts together. And we have an enlightened, pro-business administration. Economists have been looking for an end to the world as the UK knows it for two years.  As we predicted earlier – it won’t happen.

Naturally, the E-Z remains a potential threat for the UK.  Fine.  We all have our pianos just overhead.

Robert Craven

The Week Ahead

A good deal of the US vigor we had identified earlier has now been priced in.  In anticipation of that event, and, as a way to trade the Fed forecasting error, we had recommended that clients look to own (L – S) the Euro strip and term structure (5-10, and 2-30).  Both worked well and we are finished with those.

In the most general sense clients are to look to own US strength, even now and to look to sell the E-Z, either outright or against the US; the E-Z is headed for the dumpster. We are modestly constructive on the UK.

The market view late last week for the US parallels that of early Q4 and early Q1. On both occasions, consensus was that the party was over (although each time for different reasons), that there is a reduced or no chance for further US economic progress. On both occasions we predicted just the reverse. Now these same observers, rolled twice, seem to be asking to get rolled again. Short of a spike in crude, reality will oblige them.

Thus, fade a weak confidence read on Tues and/or Friday.

Fade a weak Durables print on Wed. The revision to Q4 GDP on Thursday is ancient history and irrelevant.  The Claims print for unemployment insurance on Thursday may provide some entertainment. If the figure is bloated, it is a fluke and trade the number with that in mind.

The Chicago ISM (old NAPM) on Friday is important as the leading characteristics of this region are good for the US as a whole, especially the New Orders and Employment components. Both are very useful in sounding for the seascape just ahead, a tool we use regularly. Thus, any real weakness would be worrisome.  We would not recommend that any trade be set on such weakness as it might just be meaningful, and would require an honest reappraisal, our side. 

Also Friday we have Feb Personal Income and Outlays. Both personal and disposable income have risen modestly lately.  That will improve as we move ahead.

Finally, this week we will see key reads for the UK and Germany.  If there are major surprises for the UK, these will be to the side of relative vigor. The risk is that German releases will disappoint.

Robert Craven

Week in Review

Results this week fit satisfactorily with anchors set earlier, Canada the exception.

In the US, jobs-related activity continues to “surprise.”  Thursday’s Claims print was better than expected; it is at a 4-year low and has been on a declining trend since last September.  It was last October and again early Q1 that we predicted jobs-related activity would flatten street forecasts, and why, and for clients to count on it.  Understanding this dynamic was the single most important factor in isolating the recent major change in trend for US growth; actually the key major change in trend for the entire free world for without the US engine, the rest are sunk.

In the E-Z we saw that Euro-area services and manufacturing activity in March contracted more than economists forecast, much based on declining domestic demand. It is better to be prepared for these results, than to have to react. The E-Z is sliding into a recession so don’t let that be a surprise.  We had predicted that E-Z results would “disappoint,” that observers would miss on their forecasts. This included those for Germany.

Key to understanding reality for 2012 for the E-Z  is to understand that bank credit will prove elusive for most borrowers. There are other retardants, but this is the one that was not priced in.  ECB generosity will not trigger a lending revival; it won’t happen.

Early Q1 we predicted that UK consumer activity would just exceed estimates – not vigor but more than predicted - yet Thursday’s Feb Retail Sales print was inside of expectations (-0.8% vs -0.6%, consensus).  We would fade this print. It is well known that this series is volatile this time of year. And if we back up a tad, we see that Sales in the three months to Feb were +1.7% higher than a year ago, the largest increase since Dec/09. Most forecasters were predicting a decline.  So we’re ok with our anchor for this credit.

Events in Canada have not fit.  Jan Retail Sales (although ancient history), at +0.5% was far inside of expectations, and not the result we expected.  We had predicted something more from this credit than she will deliver over the near term.

Observers were shocked this week to learn a private PMI survey of China’s Mar industrial activity was lower than expected, at 48.1, a contraction, and especially in new orders and exports.  Of course the government has their own PMI; it was 51 for Feb. Not bad, but then nobody believes the government.  Our view is not to panic; the private flash PMI (HSBC) is skewed as it surveys mostly smaller firms which have less access to bank credit than larger firms. There will be no “hard landing.”

Finally, crude remains the piano overhead. Well-known supply constraints persist (thank you Obama), seasonal formula changes, and of course, the mullahs’ choreography.

Average gasoline prices in the US are now the highest ever recorded for March.  There is not a threat these will erode consumption; it is now a reality (and of course all energy related activity, not just the consumer).  If conditions trigger $5 at the pump and for an extended period, then those conditions will bring growth to a near halt. Whether substantive or not, $5 will have a tremendous psychological impact on the consumer.

Robert Craven

Crowd Behavior

From time to time we feature a trade to illustrate a market dynamic.  On Mar/9 just after NFP (and before the scheduled FOMC on Mar13) we recommended that clients own the US term structure, especially the 5 – 10yr and 2 – 30yr spreads, then 114 and 285 respectively.  Last, 117 and 308.  Fundamental developments have for some time dictated that the course-of-least resistance for the yield curve be wider; it was the Fed’s acknowledgement of these developments on Mar/13 that persuaded the market crowd to take note. The Fed is their god.

Thus, a handy little lesson: one must understand economics to make macro strategy but this is not all; one cannot think like an economist if one expects to do well. We must integrate both left-brain oriented activity (engineers, cpa’s, st analysts) and right-brain oriented activity (artists, musicians, entrepreneurs) but the right brain must dominate – this is the key to making good strategy.

We are finished with this curve demonstration.

Robert Craven

The Week in Review

An authority figure gave the market crowd permission to “see” what had been plainly visible all along –  vigor in US jobs creation and spending, and the obvious – momentum ahead.  Suddenly street economists have revised GDP from 1.5% to 3%. Suddenly world institutions can’t sell debt fast enough, nor own enough equities.  

Past many years we have seen similar episodes, near parallels in fact; that does not make this one any less fascinating.

The world market crowd’s epiphany has fit very nicely with desk anchors set earlier.

There are many ways our insight could have been exercised - the Euro strip and the longer term structure two of these. But desks don’t need to parrot us; they have their own methods.  The value we provide, our product really, is a clear view of the economic landscape just ahead.

Crude will remain a significant threat.  Iran must get their choreography just right. They have no intent to bomb anybody.  This is all about posturing.

There is only one real solution to the problem – internal dissent and the mullahs tossed out.  Dissenters were abandoned by Obama two years ago. A new executive may make the difference.

Robert Craven

Permission Granted

Markets are cheered by the Fed’s moderately brighter outlook (and bonds worried). This is why closing the pattern ahead is not so much about economic models, but understanding crowd psychology; this is what explains our success.

We have known for months that observers, including those at the Fed, would miss US relative vigor just ahead. But the market crowd, whether groups of individuals here and there, or the entire lot, cannot act without an authority figure granting it approval. It needs a god and in most cases, this is the Fed.  Once the Fed puts it stamp of approval on what before amounts to a hunch, the market crowd is free to tear off. That is what we have just witnessed.

With this in mind, we advised clients on Feb/16 to look to own the Euro strip, using 9/12 – 9/13 as an illustration, then -13, target -25.  Last, -25.

Next, in our Mar/9 sketch we reminded clients that the course-of-least-resistance for the term structure would remain wider, and under no circumstance to set a trade looking for the reverse.  In that sketch we recommended clients own both  5-10, and 2-30, printing 114 and 285 after that day’s NFP release.  Last 115 and 298.

Finally, know that the Fed’s forecasting track record is poor.  Fine, they are only human (despite what some of them maintain).  Here the Fed has come to understand what we understood much earlier.  But that can change, and quickly.  We simply have to be there first.

Robert Craven

US Consumer to the Rescue

The view is growing worldwide that only the US consumer can retrieve other major credits from the ditch.  Agreed.

China recently reported a Feb trade deficit which was much larger than expected. It usually swells that time of year (lunar new year is celebrated in Feb) but this time it was larger than in 2010 and 2011. So that is a worry to the market crowd.  Japan will do better than economists understand, just not a barn burner. Canada just reported a weak Payroll number (contrary to our expectation). Brazil, the one-time Latin American powerhouse now can’t seem to get out of its own way. The E-Z is going nowhere, Germany included. Industrial orders for this credit fell 2.7% in Jan for goodness sake. That doesn’t say much for its export sector. Last year we predicted much weaker than expected results for both Germany and the rest of the E-Z and it looks like we were right. The UK will do a bit better than it is expected to do, so that will help a tad.

All in however, there are no emerging stars on the world scene, except one – the US consumer.

Key is attitude.  The US consumer is sick of hearing of the antics of the clowns in the E-Z.  They are ignored.  But signs of domestic employment vigor have a very positive impact on attitude, for both the employed and of course, those on the hunt (and a mild winter hasn’t hurt either).

This explains today’s improved Retail Sales result for Feb. Energy prices were not the whole story; there was plenty of spending elsewhere and not just for vehicles, and, in spite of higher gasoline.  Without the recent spike in gasoline prices we would have seen Core Retail Sales ex-gasoline at perhaps +0.9% instead of the +0.6% print.  If we hit $5/gallon gasoline, core retail sales ex-gasoline will print perhaps 0.2%.

Barring that impact, US consumers will remain the world’s #1 engine right through 2012. Until earned income catches up, they will borrow the difference.

Robert Craven

Today’s FOMC meeting.

In the old days the Fed made plenty of careers on Wall St – so-called “Fed watchers,” called to duty as one had to read the tea leaves to make out policy intent; there was no announcement post the FOMC decision.  An entire industry was spawned.  Most of those still alive hate us to this day as we had a hand in ending that charade, and their jobs along with it.

Now Bernanke had taken pains to achieve transparency by the means of a huge group hug; no more cloak and dagger stuff but a sensitivity session out of the 60’s. But since 1) the Fed is not especially adept at discerning the economic landscape ahead, and 2) the market crowd takes what policy makers say as gospel, it will backfire.

Witness a recent Op-Ed in the WSJ, Feb/22, - Why We Can’t Believe the Fed by Ben Steil of the Council of Foreign Relations.  Here one of the crowd scolds the Fed for a greatly flawed forecasting track record.  A god should know better. The whole article is freighted with the sense of desertion and abandonment.

Captain James Cook allowed the Hawaiian natives to believe he was a god.  When they found out he was not, it did not end well for him.

FF’s will not remain at rock bottom into 2014 as Bernanke says they will.  Economic vigor will see to that.  More policy makers are coming to understand that reality.  Maybe Bernanke too, but from an activist Fed this servers the role of cheerleader, which is about all the Fed can do.

This Fed’s interventionist policies have presented at best a wash – great for equity types, lousy for the rest of us. We do not have a liquidity problem.  We do not have a monetary problem. Bernanke needs to learn to sit on his hands.  We have a fiscal problem – too much spending, too much debt and too much taxing.

The Fed has no more tools and so has turned to cheerleading – making statements about intent in the hope of assuring the market crowd of its commitments. But of course rock bottom short rates in times of 1) nascent price pressures and 2) expanding economic momentum mean just one thing – an expanded term structure.

Exercise this view by the way of the Euro strip.

Robert Craven

The Week Ahead

Eventually, insight surrenders its luster, sheds its horsepower. This is part of the cycle - economists catch on, reality is priced in and we move to the next opportunity.

Our method is to set anchors for clients so they may weather the storm, that confusion regarding economic reality just ahead.

Early on we put the spotlight on three US sectors where clients could expect results to flatten estimates – manufacturing, job creation and spending. Having the flaw to economists’ models in hand gave us a leg up on price discovery.  These were set Q4 and again, early Q1.   But are they still needed?

It seems most of the vigor we identified in manufacturing is now priced in. So we don’t expect this week’s related releases to vary much from expectations.

We explained in Friday’s sketch that job creation (and soon too, earnings) will continue to broach estimates.  That anchor has of course served us very well and remains in place.

This brings us to spending. There has been some slippage; Retail Sales for Jan were disappointing, only modestly above the Q4 average pace.  But recently we have seen a burst from the consumer, in vehicle sales for example, higher earned income or not.  On Tuesday we have Retail Sales for Feb and we can expect these to come in better than forecast.

Crude prices remain the piano just overhead.  The average price for regular gasoline is $4.35 in our neighborhood.  At that price, the consumer may drive 3 miles to a restaurant but not the 15 to get to the old favorite.

Despite an upcoming 6-nation summit with Iran, violence is still very much a possibility, especially if the mullahs miscalculate.  The Saudis say they will chip in, but don’t count on it as they too could be in the crosshairs.  But we don’t need violence, simply the enduring threat of the same. Then five dollar a gallon gasoline will severely brake the world’s #1 engine.

Robert Craven

Today's Feb Non-Farm Payroll report

Background: There are two reports, both released by the Bureau of Labor Statistics (BLS). One is the “establishment survey” covering over 400,000 businesses from 500 industries (it is “non-farm” now as too many BLS samplers were run down by bulls or shot as trespassers). This is the most comprehensive labor report available and covers about 1/3 of all non-farm, non-self-employed workers. From this beauty we get jobs by industry, then hours worked and earnings, weekly earnings being a reliable leading indicator.

The second survey, the “household survey” measures results from roughly 60,000 households.  From this little dandy we get a figure representing the total number of individuals out of work, thus the unemployment rate.  It goes without saying that this is a lagging indicator.

The “establishment” measure is larger than the “household” but excludes agriculture and the self-employed. The “household” report runs a smaller sample but since the self-employed are included, it can be more useful during times of a recovery, as these jobs are the litmus paper for such an event.  This survey is a type of census really, which is why for example the unemployment rate may lift while at the same time the headline can show an increase in jobs.

All in, the report is closely followed and for a good reason - it has a respectable track record of predicting cycles.

Result: Job creation in Feb was strong and the prior two months were revised higher. And private sector employment increased nicely. It will become more difficult for the willfully blind to miss what is obviously an acceleration in job creation. We also see that hourly and weekly earnings increased in Feb, but at a modest pace.  We would have preferred to see something more, and no doubt will over the intermediate term. In the meantime US consumers won’t let this modest inconvenience get in the way of shopping – they’ll borrow the difference.

Strategy:  It is very easy to cherry pick to fit one’s bias but it means death in this business to do so.  We identified US Q1 2012 strength in Q4 when the rest were looking for weakness, and some famous names, a double dip.  So at some point we need to acknowledge that our view is priced in, that economists have finally come to understand what we understood months back.

Yet most now predict a slowing, a loss of momentum because that is the easiest mental exercise; it is based on precedence, recalling early 2011.  These individuals are mistaken.  Thus we can look for continued surprising vigor in job creation ahead. 

From time to time we apply a trade to translate our insight to the bottom line. For example, from Feb/16 we have looked for Eurodollar prices to erode the further out the strip and recommended owning the (L) Sep/12 – (S) Sep/13 spread, then -13.  Our target was -25.  Last -20.

We have also predicted for weeks that the course of least resistance in the term structure was wider.  It hasn’t gone much of anywhere given events in the E-Z and flt to sanctuary.  But we are right re direction so do not under any circumstances look for the reverse. If interested in this exercise, look to own both (L)5 – (S)10 or 2 – 30.  Both will move along at a modest rate, nothing spectacular.

Robert Craven

IRAN

Our view has been all along that Iran is bluffing.  Bluffing or not, we still could highlight this situation a few weeks back as a real threat to US growth, given the near-term direction of gasoline prices.

Key is that the mullahs get their choreography just right.

As part of the dance, further talks have been scheduled, this time with six world powers - US, UK, Fr., Ger., Russia & China. The last set of talks, in Istanbul of Jan/11 broke down.

We have written often of tension in the Middle East, of impact on crude, then impact of higher gasoline prices on US consumers.  In this case, although the mullahs sound crazy, we believe they are not. They have no intention to bomb Israel or anyone else. It is that they are a failed theocracy (oxymoron) and so need an enemy offshore for sake of diversion.  That would be the West.

Of course we can get in a lot of trouble if they misjudge, taking the dance a tad too close to the edge of the stage.  But if things go right for them, they’ll be able to remain in power by appeasing the masses with gifts from the West.  If not, they fear they will be thrown out – the West’s preferred method all along; yet lacking the support of Obama, the last attempt (2 years ago) failed.

The mullahs can’t risk another uprising.

Robert Craven

The Week Ahead

There are two dynamics impacting the view of the mkt crowd just ahead; more accurately, just how they will be misled.  One is that economists still under-estimate US vigor for H1, relaying on a replay of 2011 to set them right and reclaim their dignity.  The other is that these same observers under-estimate the impact of crude, thus the impact of gasoline prices on the American consumer.

We must realize that consumer activity is significantly threatened. We were the first to understand US vigor when others were looking the other way; we want to be first to understand that being curtailed, if indeed, it is to be so.

We have two key releases this week (neither of which will shed any light on the impact of crude): the ISM Feb Non-manuf survey Monday and Feb NFP on Friday (Factory Orders (Monday) are rarely a mkt mover as we already have the Durables component). We can expect the Feb ISM survey to come in just a tad, worst case, but when we see that print we should recall that business activity in the service, construction and gov’t sectors accelerated in Jan to is best pace in nearly a year.  Not too bad. It’s simple folks. A cyclical expansion is currently in place and it is gaining strength.

Finally, to Friday’s Feb Payroll release. We’re not sure re the headline print, but high-powered jobs will expand, esp manufacturing.  And av hours worked and salaries will also pick up.  No steam roller, but certainly a contradiction to last week’s Income and Spending print.  Consumers are optimistic. They’re borrowing for better times ahead.  We’re not launching a satellite here folks.

Consumer reaction to gasoline is key and for that we will have to wait.  That is part event, part wild card.

We no longer have the E-Z as a wild card; only as an irritant, seemingly unending.

Robert Craven

The Week in Review

In all years we’re been at this, we’ve rarely seen as confused a bunch of observers as we had last week.

Headline Jan Durables tanked on Tuesday but a moment later we found Feb consumer confidence was at a 1 yr high; Q4 GDP (R) was a tad better on Wed and the Chicago NAPM and Rich Fed manuf survey flattened expectations that day, then Claims continue to cheer on Thursday, but then Jan Personal Income and Spending went nowhere, and the national NAPM fell inside of expectations. Then we found that vehicles sales in Feb were at their highest level in nearly 4 years (making a large contribution to Q1 GDP).  And merchants reporting their sales reported gains that exceeded St estimates. "This was a very strong month. A new life has been breathed into the retailers," said Ken Perkins, president of Retail Metrics, a research firm. "Consumers are starting to feel much better about their overall situation."

My goodness, what is an economist to think?  It’s so easy after all to look for a repeat of last year; if it’s one thing economists like, it’s precedence (which is why most get into a whole lot of trouble).

Best is not to think, at least not too much.  Getting all tied up in knots does no good.  For those who can relax, and back away and in so doing gain perspective, it is those who will be gifted with ownership of the economic landscape just ahead.  This process cannot be forced, but will come naturally for those who do not resist (in the fashion of the Tao).

Next, voting members of the FOMC this week continue to back away from the scenario of FF’s in the cellar into 2014, except that is, Bernanke who just Wed made the case for an accommodative stance; not just now, but likely later.  He probably knows that won’t happen, but it’s cheerleading and the Fed loves to put on that skirt and grab the pompons.

Robert Craven

ISM Manuf Survey

Background:  As we noted post the Chicago release yesterday, the ISM national survey is thorough; it canvases 18 manufacturing industries questioned by the way of Production, New orders, Supplier deliveries, Inventories, Employment, and  Exports and Imports.

Then a diffusion process is applied to the answers, which recall can be only “better,” “same” or “worse.” The result is calculated by taking the percentage of respondents that reported conditions better than the previous month and adding to that total, half of the percentage that reported no change in conditions. Thus, a 50 would indicate and equal number of respondents reporting “better conditions” and “worse conditions.”

Result:  This measure hit the highest level in Jan (54.1) since June/11.  The pace of growth nationwide is not booming (it is in some regions) but is still gathering momentum, all in. This is true despite today’s less-than-expected result.  But the Feb print did not fit our anchor set for this sector, being weaker than consensus. Thus we did not provide a reliable set for our clients.  We must be careful not to marry any view. Perhaps manufacturing is due for a pause, Q2, but we doubt that.

We see today that New Orders grew a tad slower than earlier, that Export orders grew more quickly than earlier, that the pace of Production growth came in just a tad and that Inventories declined slightly.  Finally, we see that Employment grew just a bit less quickly. Still, this was the twenty-ninth consecutive month of expansion for factory jobs, which of course bodes well for manuf jobs in next weeks NFP report.

The factory sector has grown for 31 consecutive months. No barn burner, but if we recall estimates for this activity several months ago, it was for stagnation. We could not predict for our clients then the exact result, but we did predict that these results would flatten estimates. We’re not prefect as today’s miss shows and so will re-gather at bit, gain some perspective, and be back.


Robert Craven

Feb Chicago NAPM

Today’s Feb Chicago (and perhaps more than you knew you needed to know!)

View:  Manufacturing - a smaller portion of US activity than the early days, but as good a lead as they come.

Background: This trusty release and others like it used to be just the “NAPM” to those of us old enough to remember, or the Nat Assoc of Purchasing Managers survey.  There are 163 districts in the US; most are affiliates of the umbrella - Institute of Supply Mgmt, which decided to get heavy handed and change the regional survey name to Purchasing Manager’s Index (PMI) instead, the name of their own survey. And eventually the idea is that the districts will all change name, to indicate their allegiance; for example, the Board of the Houston NAPM on Jan/2011 approved the name change to ISM – Houston (but not, we hear, without a brawl in the board room!).

Still, many districts send out their own survey, proudly clinging to tradition. There is also the national survey for manuf and, as of June/1998, one for non-manuf (due tomorrow and Mar5 respectively), both compiled by the national organization and both reflecting the entire US; in the case of manuf it includes 18 industries. The information in the regional reports is not used in calculating the national report – “no way we trust those guys!” All the districts use the same questionnaire - five (5) sub-indexes, weighted as follows: Production, .25 / New orders, .30 / Supplier deliveries, .15 / Inventories, .10 and Employment, .2. - but with Exports and Imports added to the national survey and weighting changed a tad.

Then a diffusion process is applied to the answers, which can be only “better,” “same” or “worse.” The result is calculated by taking the percentage of respondents that reported conditions better than the previous month and adding to that total, half of the percentage that reported no change in conditions. Thus, a 50 would indicate and equal number of respondents reporting “better conditions” and “worse conditions.”

Result: The key Chicago district read slowed a tad in Jan but from a very solid pace; factory activity has now been growing in this region for 30 consecutive months in fact and faster than the average for the whole country. Because inventories are lean, production gains are strong.   With today's read, we note that the Employment print was the highest since 1984 and New Orders were through the roof, their highest level since Mar/11.  Past years we have found a sound correlation between the Chicago Employment read and NFP.

Desk Strategy: We have isolated the manufacturing sector as an anchor for clients for several months, predicting that results would exceed estimates for this sector and that they should trade with that in mind. With an occasional miss, that was the result.

It is true that manufacturing does not make up the large percentage of activity it did in the old days but we have found that its leading characteristics are sound, especially those of the Chicago region and the ISM national results, and especially the New Orders and Employment components.  These releases are key in soundings for the seascape just ahead. The factory sector is not roaring naturally, but getting close. It is not firing on 8 of 8 but 6+ of 8 and heading to 7, contrary to market view which had it in a near-term stall.  No way. There is more 1) domestic and 2) offshore demand than economists have yet come to grips with.  They will make that correction in the near term, and with that, GDP.

Robert Craven