Even Biased Upward, Something’s Up With US Manufacturing

In February 2015, IHS Markit thought that the US manufacturing sector might be slowing quite against every expectation. Its final PMI reading for the month of January was 53.9, down quite a bit from highs registered in the middle of 2014. Some of those fears seemed put to rest the following month when the flash reading for February 2015 rebounded to 54.3. That was subsequently revised upward early that March, for a final 55.1.

Economists were, of course, thrilled. What slowdown, they asked. Janet Yellen was right, this was all oil gluts and transitory speedbumps as the US economic risks were closer to dangerously close to overheating than any sort of renewed slump.

None of that was true. By February 2015, the domestic manufacturing sector was already many months into a protracted recession. Depending upon the specific statistic, while the overall economy may have just barely missed an official peak declaration (from the NBER) American industry would go under for an extended period lasting in some places as long as two years.

The exact duration and more so its depth wouldn’t be fully revealed until years later. Most people might remember Markit’s 55.1; I have no doubt they’ve never seen a single story written about the four-times revised benchmark for durable goods or Industrial Production.

What becomes painfully obvious is how upward biased these statistics can be. There is no nefarious intent here, just the misapplication of the Great “Moderation.” This kind of data was created and built upon assumptions that economies face only a binary option – either recession or growth. If it isn’t the former then it must be the latter.

High-frequency data is therefore predisposed toward one direction or the other. Changing from one to the next is relatively easy, meaning safe when the NBER makes a declaration. The numbers are revised out of trend-cycle growth and into trend-cycle contraction relatively quickly. Without any official cover, the result is what you see above – very tardy recognition of downturns.

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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