This is also one of the longest consecutive growth cycles of rising factory orders since 1992, when these reports began being published.
As mentioned in previous Weekly Briefs, for the past 20 years, many US companies have been relocating their manufacturing plants back into the US to limit the risk of supply chain disruptions and theft of intellectual property (IP). The biggest financial risk to contracting with foreign manufacturers, whether iPhones or bicycles, is the risk of providing foreign manufacturers with patented blueprints so they can make the products. If these blueprints are somehow released to the competition, the market share is compromised. Samsung was ordered to pay Apple $1.05 billion in 2015 for their infringement of several Apple-designed iPhone features, including bounce back scrolling feature and zoom text with finger tap that Samsung somehow obtained and incorporated into their own phones.
Yesterday was also the release of the US ISM Manufacturing Report, which is based on a survey among purchasing managers. This report was not so rosy. The ISM index dropped below 50 to 49.0, which forecasts a contraction for the industry. Trading Economics offered this summary:
“The ISM Manufacturing PMI declined to 49 in November of 2022 from 50.2 in October and more than market forecasts of 49.8, pointing to the first contraction in factory activity since May 2020. New orders (47.2 vs. 49.2), supplier deliveries (47.2 vs. 46.8), and a backlog of orders (40 vs. 45.3) contracted faster. Also, employment declined (48.4 vs. 50), with companies confirming that they are continuing to manage headcounts through a combination of hiring freezes, employee attrition, and now layoffs. At the same time, slower growth was reported for both production (51.5 vs. 52.3) and inventories (50.9 vs 52.5). On a positive note, price pressures eased again (43 vs. 46.6).”
Timothy Fiore, Chair of the ISM Manufacturing Business Committee, stated in the report:
“Managing head counts and total supply chain inventories remain primary goals. Order backlogs, prices, and now lead times are declining rapidly, which should bring buyers and sellers back to the table to refill order books based on 2023 business plans.”
The growth of domestic factory orders is a trailing indicator of actual recent growth, while the ISM Purchasing Manager Index is a forecaster of the future. Factory orders continue to rise as managers are citing concerns orders may decline in 2023. It will remain to be seen if the less-than-rosy ISM forecasts come to fruition.
What Does This Mean to Me?
There are many facets of the US economy, and rarely are all components functioning at peak performance. It is important to focus on key aspects of the US economy to determine its overall health and potential for continued growth. We often focus on consumer sentiment, confidence, and spending because consumers represent 66% of the overall economic activity. If factory orders are increasing, then supply chain issues are diminishing and smoothing out the product delivery that has challenged businesses since the start of the pandemic. However, the consensus among the purchasing managers is slower growth in 2023 over concerns of rising interest rates and prices that may slow product sales and new orders. No doubt, business leaders are taking notice of rising interest rates and prices and implementing precautions should the US economy slow faster than projected. All this to say, the most anticipated recession forecasted for 2023 indicates a low bar of expectations for next year that may result in pleasant surprises should conditions not be as dire as analysts' projects.
We maintain over overall favorable rating on the US economy and the prospects of the stock market recovering. There has been no time in history the US economy has not recovered from recessions and the stock market has not rebounded to new highs. No doubt, business leaders are taking notice of rising interest rates and prices and implementing precautions should the US economy slow faster than projected. All this to say, the most anticipated 2023 recession for this century indicates a low bar of expectations for next year that may result in pleasant surprises should conditions not be as dire as analysts' projects.