I have only one concern in these numbers, the starting point.
From the WSJ:
A jump in new orders spurred U.S. factories to step up production, with manufacturing expanding in December at its fastest pace in more than three years, according to a survey of U.S. purchasing managers released Monday. Similar reports in Asia and Europe also showed the pace of expansion quickened last month.
The mounting evidence of a global manufacturing rebound gave world stock markets a boost on the first trading day of the new year. The Dow Jones Industrial Average rose 155.91 points, or 1.5%, to 10583.96.
“It’s looking very good and not just in the U.S.,” said Zach Pandl, an economist with Nomura Securities in New York. “The economy has a lot of momentum right now — it’s a good sign that we’re turning a corner.”
The Institute for Supply Management reported Monday that its purchasing managers index rose to 55.9 in December, the highest level since April 2006. Numbers greater than 50 indicate expansion in the U.S. manufacturing economy.
The report suggested the economy is growing quickly enough to avoid slipping into a double-dip recession: In the early 1980s, for example, the economy slipped back into recession after a brief recovery.
Monday’s U.S. manufacturers report said the index of new orders rose to its highest level in five years, and an increase in its employment index showed manufacturers were hiring back workers to meet rising demand.
Manufacturing’s share of the U.S. economy is much smaller than it was in the 1980s. But it remains an important bellwether, highly sensitive to changes in the economy. Many nonmanufacturing businesses — from car dealers to long-haul truckers — rely on its good health to survive.
“The odds of a double dip have gone from one-in-three to one-in-five,” said Don Ratajczak, a consulting economist with Morgan Keegan.
The risk, however, remains. Big question marks hang over the U.S. economy, prompted by high levels of household debt and a still-stagnant housing market. Although U.S. manufacturing appears to be growing, activity is still down sharply from what it was before the recession. In November, according to the Federal Reserve, manufacturing production was 13.3% below its December 2007 level.
It is pretty clear what we have is inventory restocking. Levels were abnormally low going into the Holiday season (intentionally) and now that it has been worked through, we need to replenish.
My fear is that we replenish simply to prior levels (or less) out of caution and then pause, causing activity to drop. Remember at the end of 2008/beginning 2009 the world essentially came to a standstill as consumers went fetal. Using these data points as a reference simply is not an accurate way to look at our current situation. If that is true then our “rebound” is not a great as is being depicted and the seeming burgeoning optimism that is being created from it needs to be tempered.
Should we be optimistic? Yes, we are clearly going in the right direction, we are just not going there as fast as the data would lead us to believe. Caution is still the key word here.
Now if we see activity taper off then we know manufacturers (and by default the whole pipeline) are being cautious in their inventory levels. My concern is that the current market’s reflection of this activity may be signaling an anticipation of the current uptrend continuing without pause.
I think we may be at an inflection point here and that news could cause a significant move either way. As investors this makes our margin of error far smaller than usual no matter what we do. Sell here and we could miss tremendous upside should data remain positive. Buy here and should data pause/decline, you could quickly find yourself underwater. My thinking is that risk here is towards the later.