Economist Sees Industrial Markets Looking Sluggish But Not Necessarily Worrisome

The most recent measure of industrial activity, the Institute for Supply Management’s Purchasing Managers Index (PMI) for manufacturing in December came in at 48.2, marking a second month below the 50-point mark that separates growth from contraction. Is that cause for concern for electrical manufacturers, reps and distributors providing MRO and OEM products to factories?

Industrial market results have been looking soggy and underwhelming but not necessarily worrying, said IHS Global Insight Economist Mike Montgomery in a discussion with Electrical Marketing. Despite concerns raised by some financial market pundits that we may looking at an extended manufacturing recession, the numbers are more accurately seen as sluggish, he said.

“The best way to describe the ISM manufacturing number is more with adjectives than with the number. Anything within a few points of 50, it’s essentially unchanged. It’s good if it’s between 52 and 55, and it’s great if it’s above that,” Montgomery said. The U.S. PMI has been in the 50 range since August.

“Five straight months of going nowhere when the going nowhere is supported by other data like industrial production numbers and totally mediocre orders numbers for months and months, manufacturing is essentially stalled. That doesn’t mean people aren’t getting kicked in the teeth, they are.”

In Montgomery’s analysis the industries getting hurt are those most sensitive to foreign trade, where the strength in the dollar provides a headwind, encouraging imports and discouraging exports. Industries like primary metals, specially steel and aluminum, get hit hard, he said.

Inventory correction is at the other side of the recent malaise in manufacturing. When the economy got stronger at the tail end of 2014, inventories got a little too high. The manufacturing sector has gone a long way to clearing up its inventories, but wholesale and retail inventories still have some correcting to do. “We’ve had somewhere between nine months to a year of mediocre industrial activity, with prospects for another six months of it as these things work out.”

There are other reasons to expect this to continue for a while. China cutting back purchases is the main driver of the slowdown globally as manufacturers all over the world who geared up to supply the demand generated by China’s massive growth now must deal with excess capacity and the uncomfortable adjustments that requires. The effects of this overcapacity are felt strongest in the emerging markets that were primary suppliers to China’s construction boom, and the global capacity surplus figures prominently in some pundits concerns.

However, Montgomery considers concerns about overcapacity misleading. “The overcapacity story is overblown. It’s not wrong, but it is exaggerated. We’re going from a period when everything seems to be growing and growing well to where we dip a little bit. Some industries like steel are in real live recessions. Capacity utilization in steel has gone down bunch. Dropping 10% of your production will do that, but it’s more of a short-term phenomenon and it’s based on special circumstances. There’s probably too much production capacity in China. That’s going to go the way of the gooney bird, but it just hasn’t happened yet.”

Looking at the electrical industry in particular, electrical product manufacturing has looked stronger than manufacturing overall, he said. Particularly, makers of transformers, motors and generators are doing fine, and production of batteries is strong, in part related to the growth of electric vehicles.

“This is not a disastrous environment, it’s just what it looks like when you’re in a very long stall. We had this three years ago but at that time we didn’t have the extra drag from the really strong dollar. If you look at when the ISM was last under 50, it was 48.9 in November 2012, and it stayed in a range of 49-51 for close to six months. That was another inventory correction, but a mini one.”