PMIs and Share Prices Move in Opposite Directions, U.S. versus Canada

In June, three of North America’s major stock market indices headed upward again after tumbling in the two previous months.

The S&P 500 was +4.0% month-end-closing to month-end-closing, the Dow Jones Industrials +3.9% and NASDAQ +3.8%.

Only the Toronto Stock Exchange was hesitant, staying flat at +0.7%.

Furthermore, as of June 29, NASDAQ was +5.8% year over year, the DJI +3.8% and the S&P 500, +3.1%. The TSX was a gut-wrenching -12.8%.

The U.S. share price indices are broadly-based, with representation from firms in manufacturing, finance and business services, high-tech and resources. The Toronto Stock Exchange is more closely tied to banking, insurance and raw materials, with manufacturing struggling for the limelight.

Therefore, the foregoing index results are a little hard to explain given what’s been happening of late in the manufacturing sectors of each economy.

Of late, the U.S. economy has slowed from a trot to a walk. (Rarely, since the recession, has it galloped.)

The latest indication of lethargy can be found in the Purchasing Managers’ Index (PMI) of the Institute of Supply Management (ISM).

June’s PMI reading was 49.7%. That’s the first time the figure has been below 50.0% since July 2009, as the recession was ending.

According to the ISM, a figure above 50% is a sign both the broad economy and manufacturing within it are expanding.

Between 42.6% and 50.0%, the economy overall is growing but manufacturing is pulling back.

Below 42.6%, both the economy and manufacturing are in retreat.  

Therefore, the conclusion to be drawn from June’s 49.7% figure is that American manufacturing is slightly on the negative side of a holding pattern.

Furthermore, the drop from the month before was significantly greater than most analysts had been expecting. A fairly large 3.8 percentage points were cut from May’s figure of 53.5%.

This turn of events is unfortunate, given that manufacturing has provided considerable lift to the U.S. economy in the post-recession period.

It’s not altogether unexpected, however. A good portion of the manufacturing strength has come from exports sales.

For much of the past two years, makers of construction and farming equipment have found ready buyers in emerging nations.

The descent back into recession throughout much of the Euro-zone has delivered a blow to the developing world as well. Countries in South-East Asia depend on customers on the continent for many of their export sales.

The U.S. manufacturing sector should be protected from too steep a fall.

Declining gasoline prices will provide support for auto sales. Plus, the timing may be especially fortuitous on account of an important alteration in the outlook for our industry, construction.

The housing sector has hit bottom and appears ready to move modestly forward again.

Building product manufacturers will be among the first to benefit from the more positive vibes.

Before leaving the U.S. PMI story, one other statistic should be noted. Based on the historical relationship, the current PMI reading of 49.7% corresponds with a gross domestic product (GDP) growth rate in “real” (i.e., inflation-adjusted) terms of 2.4%.

That’s quite close to most forecasters’ expectations for the year as a whole.

Somewhat incongruously, at the same time as U.S. manufacturing has shrunk, Canadian manufacturing has just experienced a banner month.

The Canadian PMI calculation involves collaboration between the Royal Bank (RBC), the Purchasing Management Association of Canada (PMAC) and “Markit”, a global financial information services company.

June’s Canadian PMI of 54.8% may have been only a slight improvement versus May’s 54.7%, but it continued a rising trend.

The average reading for Canada’s PMI in the second quarter of this year was 54.3%, well ahead of the first quarter’s 51.6%.

Not since September of last year, has the monthly number been as high as May’s 54.8%.

The reasons cited for the improvement include both output and new order increases. Export sales have been climbing, with a better U.S. market garnering special mention.

The rate of input price increases has slowed, with a lower cost of oil being a particular boon.

There is a partial trade-off in the Canadian economy. Lower world oil prices have a tendency to hold back resource sector shares on the Toronto Stock Exchange.

At the same time, they cause the value of the Canadian dollar to slip compared with the greenback, thereby helping some manufactured-product export sales.

This isn’t to deny that there is great potential for Canadian manufacturers in resource sector development.

It just means there will always be some portion of manufacturing – the highly export-dependent part – for which activity levels may be at cross purposes to mega project construction.