Chart of the Day: Why Manufacturing Killed Monday's Market Rally
Wall Street was eagerly awaiting some good news out of Washington on a debt ceiling deal. When they heard that a compromise was struck, stocks initially rose on Monday morning. The S&P 500 index rose by about 1% almost immediately after market open. It then slowly retreated, and dove at 10:00am, when some news hit about the manufacturing sector. The index was suddenly down 1% from where it closed on Friday.
The culprit: at 10:00am, the Institute for Supply Management's July report on the manufacturing sector was released. It was ugly. The market expected the index to decline slightly to 54.3%. Instead, it dropped to 50.9%. This was the worst reading in two years. Here's how the index looks since 2006:
First, you can see that the market is right to be alarmed at what's going on in manufacturing. PMI has declined steeply since April 2011, when it stood at 60.4%. This is much worse than last year's summer slowdown when the PMI only declined to the mid-50's. You have to go all the way back to July 2009 to find a value lower than last month's.
The actual value of PMI in July also likely concerns the market. A value above 50% indicates expansion. That means the month's value of 50.9% implies that the sector is barely expanding. It if worsens much more in the months that follow, it will begin contracting. Already, new orders shrunk in July, for the first time in two years.
The performance of the manufacturing industry should be of particular concern in this recession. Since the beginning of 2008, over 2 million jobs have been shed by the industry. Although it had gained about 250,000 jobs since December 2009, if the industry does begin contracting, then fresh rounds of layoffs will follow. The only other sector to have similar losses was construction, but it hadn't begun recovering.
So instead of a modest rally, created by a little certainty out of Washington for a change, the S&P 500's closing price was about 0.4% lower than it was at the end of last week. It isn't hard to see why: this trend hardly looks like what you would expect to see in a recovery.