U.S. Manufacturing Activity Contracts, Risk of Recession Looms


By Rom Badilla, CFA

July 2, 2012

Manufacturing activity declined in the most recent report released by the Institute for Supply Management suggesting that the recovery in the U.S. may be stalling. The data release of the ISM survey, which includes more than 300 manufacturing companies and covers business conditions, disappointed market expectations as the index dropped to 49.7 in June versus economists’ forecasts of 52.0. The drop follows an index reading of 53.5 in May.

A survey reading below the threshold of 50 indicates declining factory activity which in turn, suggests increasing risks for a recession for the U.S. economy. This recent reading marks the first contractionary signal since the recession was officially declared over after June 2009 by the National Bureau of Economic Research.


ISM (Green Line) & U.S. Recessions (Grey Area)

Looking beyond the headline numbers, the New Orders Index which captures pipeline activity, collapsed to 47.8 in June from a healthy 60.1 in the prior month. This drop marks the lowest reading for New Orders since April 2009.

In addition, the Prices Paid component continues to fall further into the abyss as the index fell to 37.0 from 47.5 in May. This latest reading is well below its six-month average of 53.9 and significantly off from its most recent high of 61.0 set in April of this year.

This drop signals declining inflationary pressures and perhaps actually price declines for the manufacturing sector. Furthermore, this decline could give the Federal Reserve the green light for further stimulative policy action if conditions continue to deteriorate for the U.S economy.

In light of the disappointing economic data, U.S. Treasuries are outperforming as yields decline across the curve.  According to Trade Monster’s Bond Trading Center, the yield on the current 10-Year (UST 1.75% Coupon, Maturing May 15, 2022 CUSIP 912828SV3) dropped 8 basis points to 1.56%, reversing last Friday’s selloff. In dollar amounts, the 10-Year has a gain of 0.84% for the day. The yield on the Long Bond (UST 3.0% Coupon, Maturing May 15, 2042 CUSIP 912810QW1) is currently lower by the same amount to 2.67% for a dollar gain of 1.82% while the 5-Year (UST 0.625% Coupon, Maturing May 31, 2017 CUSIP 912828SY7) is currently trading at a yield of 0.65%, a decline of 6 basis points from Friday or a dollar price increase of 0.34%.

Conversely, equities are down, making a slight dent in last Friday’s run-up. The S&P500 is currently at 1357.58, a drop of 0.34%.

The above content is provided for educational and informational purposes only, does not constitute a recommendation to enter in any securities transactions or to engage in any of the investment strategies presented in such content, and does not represent the opinions of Bondsquawk or its employees.



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