AGAINST GLOBAL WEAKNESS, MACHINERY HOLDS SPECIAL STRENGTH

U.S. GDP BETTER THAN EXPECTED IMPLIES INFLUENCE OF OIL AND GAS

Q2 GDP did sound off better at 1.5% growth versus an expected rate of 1.2%. Though GDP shows sequential decline, it remains in growth. Caution  arises through a variety of more current data mentioned on this space yesterday.

Remarkable, however, is sustained pricing and production witnessed in machinery. Resilient strength is known in vehicle production (with sales flat or in decline). Also accounting for growth is a bottom in housing ownership which is renewing a rental market. With it comes increases in multi-occupant residential construction. We then have improved technologies demonstrating a renewed petroleum and natural gas industry here in the U.S.

All create positive business ramifications. From vehicles, structural construction and development of oil and gas fields, machinery is confirming a fundamental strength. But this strength is only as strong as its underlying causes.

INDUSTRIAL PRODUCTION RESULTS SHOW SUSTAINED STRENGTH IN NAICS 333, MACHINERY

North American Industrial Classification System (NAICS) is how the Fed and other economic data collectors classify data into groups. NAICS 333 is composed of real machine manufacturers, like Caterpillar and Deere, from there it goes into the manufacture of metal work machinery, engines, turbines, power transmission and industrial machinery which includes; saw mills, rubber and plastics, textiles and pipe production machinery. 

Last Industrial Production report from the Federal Reserve, dated July 17, tells a tale of overall weakness on a quarter over quarter basis for all items. For example, where manufacturing was up 5.6% Q4, and up 9.8% Q1….it was up only 1.4% for Q2. Keeping in mind Industrial Production is a lagging indicator, Q3 could show deeper weakness given more concurrent indicators reported on this site.

Optimism is found, however, in some fundamental items on the Industrial Production report. Machinery sales is chief in that Q4 saw an annual increase of 8.5%, up a giant 21.9% in Q1, and through a tough Q2, it was up 8.8%.

Machinery weighs heavily and significantly on the Industrial Production report at 5.41% of durable manufacturing, where motor vehicles are at 5.33%, computers and electronics at 6.25%, transportation equipment at 4.30%  and miscellaneous at 3.12% (all values are weighted against the overall index).

Sustained sales in machinery over quarters compare with noted and known strength of motor vehicles which were up 23.9% Q4, 41.0% Q1 and up 18.2% Q2. Miscellaneous Industrial Production is like autos with robust growth and sequentially up from a rise of 2.3% Q4, to 9.9% Q1 and up 13.5% Q2 (sequential Q2 growth, unheard of among indicators and shows outstanding performance).  

Computers and electronics saw a rise of 1.0% Q4, 8.8% Q1 and 5.1% Q2. For transportation equipment, data shows a progressing sequential decline from 17.7% Q4 all the way down to -.1% Q2.

From Industrial Production data over quarters, one can garner sustained strength in machinery, vehicles and miscellaneous production. Computer and electronics hang in there, but not to the degree of machinery, and other items. Transportation equipment is in sequential decline.

All told, machinery has proven itself for months to be consistent and sustained in production, as with automobiles. Next factor to look at is pricing durability over the period.

IMPORT/EXPORT PRICING OF MACHINERY HOLDS STRONG

Import/Export data from the Bureau of Labor Statistics provides this information. Dated July 12, 2012, information shows import machinery pricing up 2.4% and export pricing up 2.8% (Y/Y). Compare such result with other leads on manufacturing being computers and electronics for example. This area is down on imports  -1.8% and up some .4% on exports (Y/Y).

Versus other major items on the BLS import/export data set, machinery manufacturing especially with exports holds pricing strength. This along with sustained and continued demand tells of foundational economic strength.

Revealed in GDP is a base of resiliency. It appears vehicle and petroleum production in North America are proving to be anchors in filling what consumption exists. Consumption feeding car sales and petroleum are giving demand to machinery demand. 

Q2 GDP STRENGTH COULD TURN INTO PROGRESSING Q2 INDICATOR WEAKNESS FOR A Q3 DECLINE, OR SUSTAINING MODERATE GROWTH

Current situation is that retail sales show auto sales in decline, while data from car manufacturers show flat results. Compare this with industrial production data which shows cars still in a rate of good but reduced production. Oil and gas are in a serious issue of oil and gasoline declining globally with consumption, but consumer prices staying high due to refiner limits on end use product supplies. Housing is so infant, any growth is magical. 

Through what window are drivers of this economy looking, and perhaps seeing only their own reflection.  Chart below is the Dow Jones Industrial Machinery Index, an idea to be kicked around, especially after today.

Say China goes into deep easing and more spending on infrastructure, say Euro Zone goes into similar levels of bond purchases as known before or even more, say interest rates are generally relaxed among developing countries such that carry trades become a secure proposition.

Could we then be one step forward with global easing, but then learn at the end of easing we are really four steps back. At some point, fiscal policy aside from austerity alone must step to the plate and take a real swing.....good, bad, or indifferent, action matters.