A key gauge of manufacturing health shows the industry is contracting for the first time in a year, and many analysts urge caution on industrial...
A key gauge of manufacturing health shows the industry is contracting for the first time in a year, and many analysts urge caution on industrial stocks.
The Institute for Supply Management’s manufacturing index fell to 47.7 last month from 50.8 in the previous month, a far weaker showing than economists had predicted. A figure below 50 indicates contraction. Domestic demand is weakening, amid the housing slump.
Historically, however, an ISM reading below 50 has actually been a buy signal, as selling industrial shares then “is a little like shutting the gate after the bull has bolted,” says Deutsche Bank analyst Nigel Coe.
But Robert W. Baird analyst David Manthey says the duration of sub-50 readings is important. When they last longer than six months — as he predicts this time — manufacturing stocks have struggled. Manthey expects analysts to chop their earnings projections for manufacturers this year, pressuring stock prices.
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Merrill Lynch economist David Rosenberg, though, says U.S. industry is likely in the early stages of a “manufacturing renaissance.”
He says the weak dollar means U.S. unit labor costs are the lowest they’ve been in 30 years, relative to other industrialized nations.
It also means more foreign companies are building factories in the United States: Net foreign direct investment in U.S. manufacturing rose 16 percent in 2007.
Despite the disappointing December ISM reading, he says U.S. manufacturing is “on its best competitive footing internationally in the last three decades” and is poised to perform well in coming years.