Factory Price Data Flags Rebound in Manufacturing and ‘Broader Economic Pickup’: Expert

An auto worker takes a picture of the first Chevrolet Cruze compact sedan to come off the assembly line at a ceremony inside the GM factory in Lordstown, Ohio. On Sept. 8, 2010. AP Photo/Amy Sancetta

An often overlooked forward-looking economic indicator in production figures suggests a rebound in U.S. manufacturing is coming, and with it, “a broader economic pickup,” according to a top macro strategist.

Michael Kantrowitz, chief investment strategist at Cornerstone Macro, told Real Vision in an interview published on Jan. 25 that when the prices of inputs businesses use to make their final products hit bottom and start to rise again, this can be a guide to forecast an upturn.

“Very rarely do people focus on this input price component but it’s actually the only forward-looking data point in all the ISM data. It has an ability to forecast the business cycle with about a 15-month lead,” Kantrowitz explained.

The measure Kantrowitz is referring to is the ISM Purchasing Managers’ Index (PMI), which shows the prices of inputs jumped from a reading of 46.7 in November to 51.7 in December of last year, representing a growth of 5 percent. An earlier PMI also showed an input cost rise from 45.5 in October to 46.7 in November. But the previous month’s print for input prices shows a decline from 49.7 in September to 45.5 in October, a drop of 4.2 percent—the bottom from which Kantrowitz argues manufacturing will rebound.

An employee works on the assembly line for the Ford 2018 and 2019 F-150 truck at the Ford Motor Company's Rouge Complex in Dearborn, Michigan, on Sept. 27, 2018. Jeff Kowalsky/AFP via Getty Images

Kantrowitz explained that the indicator, which tracks the costs of doing business, drops when input costs in general or interest rates (or both) fall.

“We found, in general, that the business cycle re-accelerates after you’ve had a drop in business costs,” he said. “Interest rates have come down and now, that’s going to reinvigorate manufacturing activity, which will ultimately lead to better earnings and a broader economic pickup,” Kantrowitz argued.

He said in a tweet that another possible positive knock-on effect of lower input costs is that corporate earnings could end up revised upwards, supporting near-record high stock valuations.

“Starting in Q1, we expect positive #earnings revisions as lower input costs work their way through the global economy,” he said. “This should keep credit spreads tight and P/Es expensive,” he added, referring to the Price-to-Earnings Ratio, a gauge investors use to assess the value of stocks.

“I think the outlook is that we’re going to see a cyclical upturn in leading economic indicators,” Kantrowitz told Real Vision. “We’re already beginning to see some of that, some of the housing data has been strong now for a couple quarters. We expect now the manufacturing data to take over, to tick up.”

A similar measure to the ISM PMI is the Markit PMI. The most recent Markit PMI figures for the U.S. show private sector companies expanded their business activity in January at the fastest rate in 10 months.

“At the same time, output expectations across the private sector improved at the start of 2020, with optimism reaching a seven-month high in January,” the organization said in a news release (pdf).

Other leading indicators that typically precede a business cycle rebound are increases in new housing starts and money supply expansion.

Both of these measures have picked up, with President Donald Trump hailing the recent surge in new home construction.

“Tremendous surge in new housing construction in December, 16.9%, biggest in many years!” The president wrote on Twitter.

U.S. home sales jumped to their highest level in nearly two years in December, the latest indication that lower mortgage rates are helping the housing market to regain its footing after hitting a soft patch in 2018.

The report from the National Association of Realtors on Wednesday followed on the heels of government data last week showing home-building raced to a 13-year high in December.