Welcome to The Observatory. The Observatory is how we at Prometheus monitor the evolution of the economy and financial markets in real-time. The insights provided here are slivers of our research process that are integrated algorithmically into our systems to create rules-based portfolios.
Our primary takeaways are as follows:
- The latest industrial production data accelerated on a sequential basis, surprising consensus expectations.
- Of the 28 subsectors we track, 57% remain in contraction. This sequential expansion of industrial production indicates a slowing but growing economy.
- Nonetheless, the recent PMI data remains in contraction consistent with pervasive weakness. Zooming into the macroeconomic drivers, we observe mean reversion in the cyclically sensitive components such as manufacturing goods and autos are the primary drivers of this strength.
- In the context of markets, a sequential acceleration in manufacturing production remains support for nominal growth conditions, and our alpha strategies remain for long equities, bonds, and short commodities.
The latest data for August shows Industrial Production increased, coming in at 0.81%. This print surprised consensus expectations of 0.2% and contributed to a deceleration in the three-month trend relative to the twelve-month trend. We show the sequential evolution of the data below:
We break this print into its contributions from production coming from Food (-0.03%), Energy (0%), Autos (0.48%), and All Other Items (0.36%). Additionally, we also showcase the top 10 contributions by industry. The largest contributor this month was Automotive products, and the largest detractor was Fuels:
We zoom out to offer further context on the dynamics of industrial production. Over the last year, industrial production has expanded by 0.04%. Below, we present the top six drivers of industrial production, with the three strongest industries highlighted in blue (Chemical products, Equipment parts materials, and Paper materials) and the three weakest industries highlighted in red (Industrial and other, Foods and tobacco, and Other Materials):
Over the last few decades, the importance of food, energy, and automobiles has risen, accounting for a significant amount of the variation in industrial production. Over the last year, food, energy, and automobiles have contributed -0.11% to the 0.04% change in industrial production. We show this impact below:
To further assess the health of the current expansion of industrial production, we examine the diffusion of the 28 subsectors we track. This involves examining the number of industries that are expanding versus the number of industries that are contracting. We find that 57% of industries are contracting. Below, we visualize how a diffusion index has generally been a good barometer of the durability of upturns and downturns in industrial production:
To elaborate further, currently, 12 industries are expanding and contributing 0.83% to industrial production, compared to 15 industries showing contraction and detracting -0.8% from industrial production growth compared to one year prior. We visualize their respective weighted contributions below:
Getting even more granular, the industries seeing contractionary activity are Miscellaneous goods, Paper Products, Clothing, Miscellaneous goods, Non-energy business supplies, Fuels, Appliances, furniture & carpeting, Other Materials, Oil and gas well drilling and manufactured homes, Converted fuel, Consumer parts materials, Residential utilities, Other Materials, Foods and tobacco, and Industrial and other. On the other hand, the industries seeing expansionary activity are Chemical products, Equipment parts materials, Paper materials, Commercial energy products, Primary energy, Defense and space equipment, Construction supplies, Information processing, Textile materials, Home electronics, Chemical materials, and Transit.
As of the latest available data, our PMI composite now shows a reading of -5.48. This was a sequential deceleration from one month prior and a decline in the three-month trend. PMIs are generally strong directional indicators of where we are in the manufacturing cycle, as PMI respondents manage inventories and orders in response to their outlook on revenue and profitability. Below, we offer the latest readings of our PMI Composite, which offers us a sense of the pressures on profitability:
PMI indicators are typically biased toward the manufacturing sector. While this does indeed make sense since production is largely driven by the manufacturing sector, we think it is important to also separate these sub-indexes to understand the pervasiveness of the current trend in PMIs. Currently, our Manufacturing and Services composites are sow readings of -7.71 & -1.58, respectively, signaling consistency within the current trend:
Finally, we show the composition of the most recent prints in major PMI indices, standardized to allow for comparison. S&P Services has been the strongest of the PMIs, while Richmond Manufacturing has been the weakest.
Overall, the latest industrial production data accelerated on a sequential basis, surprising consensus expectations. Of the 28 subsectors we track, 57% remain in contraction. This sequential expansion of industrial production indicates a slowing but growing economy. Nonetheless, the recent PMI data remains in contraction consistent with pervasive weakness. Zooming into the macroeconomic drivers, we observe mean reversion in the cyclically sensitive components such as manufacturing goods and autos are the primary drivers of this strength. In the context of markets, a sequential acceleration in manufacturing production remains support for nominal growth conditions, and our alpha strategies remain for long equities, bonds, and short commodities. Until next time.