MARKET ANALYSIS
MANUFACTURING
Overview
The manufacturing sector is a significant component of economic output, reflecting the production of goods. It is a key indicator of industrial health and economic performance. Manufacturing activity is closely linked to overall economic conditions, as it affects employment, exports, and investments.
Key Metrics
- Purchasing Managers' Index (PMI): A survey of purchasing managers in the manufacturing sector, indicating the health of the sector. A PMI above 50 indicates expansion, while below 50 indicates contraction.
- Industrial Production Index: Measures the real output of the manufacturing, mining, and utilities sectors. It reflects the volume of production and its changes over time.
- Capacity Utilisation Rate: The extent to which a firm or economy is using its installed productive capacity. Higher rates indicate efficient use of resources and potential for expansion.
Implications
- Economic Health: High manufacturing activity indicates economic growth, while declines can signal economic slowdowns.
- Employment: The sector is a major source of employment, influencing overall labour market conditions. Strong manufacturing performance typically leads to job creation and higher wages.
- Investment and Innovation: Manufacturing growth often leads to increased investment in new technologies and innovation, driving productivity gains.
Factors Influencing Manufacturing
- Demand for Goods: Consumer and business demand drives manufacturing output.
- Raw Material Costs: Changes in the prices of raw materials, such as metals and energy, affect manufacturing costs and pricing.
- Trade Policies: Tariffs, trade agreements, and regulations impact the competitiveness and profitability of the manufacturing sector.
- Technological Advances: Automation, robotics, and advanced manufacturing technologies can enhance productivity and reduce costs.
INDUSTRIAL PRODUCTION
Country
Type
Manufacturing
Announced
Monthly
Description
A measure of the change in volume of the physical output of a country’s energy sector, factories and mines. This figure is significant as a short term indicator of the strength of national industrial activity.
It accounts for roughly ¼ of overall GDP and an understanding of manufacturing trends can be useful in forecasting output and GDP changes.
High or rising industrial production figures imply growth and expansion, which can lead to a more positive sentiment on local currency, however, exorbitant production and consumption can spark superfluous inflation. Interest rate policy can be used as a mechanism to keep inflation in check.
MANUFACTURING PRODUCTION
Country
Type
Manufacturing
Announced
Monthly, around 40 days after the month end
Description
Manufacturing makes up around 80% of total Industrial Production and therefore is a leading indicator of economic health. The figures detail the change in the total inflation-adjusted value of output of the nation’s factories, mines and utilities.
The manufacturing sector is a major source of cyclical variability in the economy, so serves as a pulse for general direction. As a result, a report can have a significant influence on markets so can be an important indicator when considering placing financial spread bets, although reports can often be adjusted by season or weather conditions.
Manufacturing growth, because of its make-up within the Industrial Production figure, can have a significant effect on economic growth and can influence sentiment towards local currency.
DURABLE GOODS
Country
Type
Manufacturing
Announced
8 times per year
Description
The advance durable goods report also contains information on shipments, unfilled orders and inventories. Shipments represent deliveries made, valued at net selling price after discounts and allowances, excluding freight charges and excise taxes.
Semiconductor data are available for shipments and inventories. Unfilled orders are those received but not yet delivered. Historical data began in 1992. Orders for durable goods show how busy factories will be in the months to come, as manufacturers work to fill those orders.
The data not only provides insight into demand for items such as refrigerators and cars, but also business investment such as industrial machinery, electrical machinery and computers. Durable goods orders are one of the most volatile economic indicators reported in the month and this series can be revised by significant amounts from one month to the next.
More than any other indicator, it is imperative to follow either three-month moving averages of the monthly levels or year-over-year percent changes. These adjustments smooth out the monthly variability and provide a clearer picture of the trend in the manufacturing sector.
PURCHASING MANAGERS INDEX
Country
Type
Manufacturing
Announced
Monthly
Description
This composite diffusion index of business conditions surveys purchasing managers in both manufacturing and services firms. The PMI differs from economy to economy with manufacturing the main focus in the US with the Institute for Supply Management figure the key piece of data.
Many financial spread betters with an interest in the markets don't realise that non-manufacturing activity is covered in this index and tend to focus on the manufacturing side only.
Investors should be aware that Kingsbury International LTD releases the monthly report to those with private subscriptions three minutes prior to release to the media, which may account for occasional market activity just prior to public release.
However, in Europe there is a separate manufacturing and services figure. These are derived from a survey asking about 600 purchasing managers to rate the relative level of business conditions. These conditions are widespread and include employment, production and inventories but to name a few.
In the UK, Construction PMI is viewed as key figure and is released the same day as the US ISM figure which can lead to some volatile currency swings throughout the day. This has a smaller sample size than the European figure, about 170 purchasing managers, but asks a similar range of questions relating to business conditions.
The breakeven point for the index is 50. Readings above that indicate positive growth and readings below 50 indicate contraction. The farther the reading is from 50, the more rapid the pace of growth or decline.
TANKAN INDEX
Country
Type
Manufacturing
Announced
Quarterly, near current quarter end
Description
This survey of the largest manufacturers in Japan is conducted by the central bank with a view to shaping monetary policy. The Tankan is a bellwether for the health of the Japanese economy.
The main component is the Large Manufacturers Index, since Japan’s economy is heavily export-driven. The survey uses zero as the midpoint, so the higher a positive reading, the stronger the sentiment.
Likewise, the more negative a reading, the weaker the sentiment. There is also an outlook for large manufacturers in the coming quarter. Another key component of the Tankan measures capital expenditure of all Japanese industries excluding financial services.
