BondSquawk

By Rom Badilla, CFA – Bondsquawk.com

August 2, 2010

Manufacturing activity in the U.S. continues to de-accelerate, signaling that the economy is slowing down at the onset of the second half of 2010.  The Institute for Supply Management reported that its manufacturing survey index decreased to a reading of 55.2 in July from a print of 56.2 in the prior month.  Despite the decline, July’s number surprised to the upside as economists forecasted the manufacturing index to come in at 54.5.  While the July figure is still reflecting expansion since a reading above 50 indicates growth, today’s release is the third consecutive drop after peaking in April at 60.4.

The Prices Paid survey component ticked up to 57.5 from June’s reading of 57.0, surpassing consensus surveys.  After dropping nearly 20 points from May to June, economists were expecting a further decline as evident by surveys standing at 55.0. 

Despite finding some positive news in the headline manufacturing numbers, looking further into the details reveals more evidence of an economic slowdown.  New Orders collapsed 5 points in July to 53.5 while the Production component followed suit by dropping just over 4 points to 57.0.  In line with the thesis that recent economic activity has been partially supported by inventory replenishment, the Inventories Index increased to 50.2 from 45.8 in June. 

With these components in mind, the sustainability of economic growth continues to come into question.  The economics team from Goldman Sachs who calls for an economic slowdown in the second half of 2010, stated on their website this morning that “the combination of a falling orders index and a rising inventory index is clearly not positive for future growth in manufacturing output. At 3.3 points, the difference between the two is the smallest since February 2009, four months before the recovery got underway.”

In other economic data releases, construction spending in June unexpectedly improved.  The Department of Commerce stated in a report that construction spending increased by 0.1 percent surpassing surveys which called for a decline of 0.5 percent.  Despite the positive surprise, the prior period figure was revised significantly downward by eight-tenths of a percent to a May decline of 1.0 percent. 

Looking deeper into the numbers, government spending highlights construction activity which poses more questions into the sustainability of future growth.  Private Spending declined by 0.6 percent while the public sector which played a big factor in the increase in the headline number jumped 1.5 percent in June.  Total Residential Spending decreased 0.4 percent.  Total Non-Residential Spending improved by 0.4 percent which is buoyed by increases related to Health Care, Religious purposes, Public Safety, and various Utilities.  Conversely, some of the improvements were offset by drops in Commercial and Educational Spending of 1.4 and 2.9 percent, respectively.

Despite the weaker undertones of today’s economic data releases, the surprising headline numbers dominate the market’s attention.  With a renewed sense of vigor, stocks are soaring higher.  Reactions in the bond market on the other hand, are somewhat subdued as Treasury yields are only marginally wider.  While still below the three percent hurdle, the 10-Year Treasury is higher by 4 basis points to 2.94 percent.  Interestingly, the 2-Year in unchanged at 0.55 percent, which is only half a basis point away from its all-time low set last Friday.  In similar fashion, the dollar continues to collapse suggesting that the downward trend is still intact based off of evidence of a U.S. economic slowdown.  The Dollar Index which is a measure against the world’s six major currencies is down 0.9 percent to 80.841.  Since the beginning of June, the Dollar Index has fallen by 6.6 percent.