10/1/2014
By Jennifer Coombs

It was not a positive tone at all being set for October as all of the major equity indices majorly pulled back. Firstly, in Europe the PMI data showed that the German industrial sector is contracting for the first time in 15 months, suggesting miniscule growth in the region this year. Airline stocks got hit hard, first because the FAA is requesting the replacement of 1,300 Boeing cockpit displays, and second, a new case of Ebola in the US has travelers fearful of flying. Protests are still raging on in China, although many CEOs and regional experts suggest that they won’t amount to anything more than a temporary disruption. Here in the US, the market is digesting a lot of data, primarily the ADP employment numbers. ADP's estimate for private payroll growth for September is 213,000 versus the consensus estimate of 200,000 and a revised 202,000 for August. The market also suffered from a few additional reports...

Firstly, construction activity in the US unexpectedly reversed to the downside in August by -0.8% after a +1.2% rebound in spending in July. Economists were looking for a reading of +0.5% for August, so the result is quite disappointing. The monthly decline was led by the private, nonresidential sector which was down 1.4% after a 1.3% increase in July. Public spending on construction also declined in August by 0.9% after jumping 2.1% the month before. In addition, private residential spending declined only 0.1% after a 0.4% increase in July, but ultimately we view this component as favorable. Weakness was primarily in residential (excluding new homes), where the subcomponent declined 2.0% after climbing 0.2% in July. On a positive note, new one-family outlays increased 0.7% in August after a 0.8% decrease in July and new multifamily outlays rebounded 1.4% in August after a 0.5% decline in July. New private residential outlays have been looking healthier over the last two months. Versus last year, total outlays were actually up 5.0% in August, but were up higher in July at 6.9%. Construction outlays continue to be volatile on a monthly basis, but on a yearly basis construction is improving… albeit not at the robust pace from earlier in 2014.

Next in the broader manufacturing space, we received the two final PMI readings for the month of September from Markit and ISM. The latter is more closely followed and the composite activity showed a slowdown for the month, but remains solid at 56.6. Consensus was calling for a reading of 58.0 which was slightly below the August reading of 59.0. Growth in new orders was noticeably down for the month, but remains at a strong reading of 60.0. However, backlog orders fell into a contractionary level at 47.0. Employment slowed 3.5 points to 54.6, and there was a slight acceleration in prices paid, up 1.5 points to a reading of 59.5. Both of these components are graphed with the ISM reading below. A solid gain in the production component (to 64.6) is important and points to a solid gain in the manufacturing portion of the industrial production report. Other than this, the components are indicative of a softening in September off of very strong summer readings.

Markit’s take on the manufacturing sector showed steady growth in September at 57.5 which was only slightly lower than the 57.9 reading in August and the mid-month flash reading. Details in the report describe the rates of output and new order growth as strong. Unlike ISM however, the employment component was stronger posting a 2.5-year high. Other details included an increase in new export orders which are currently at a 3-year high. The chart below shows how the Markit and ISM readings compare over the last 10 months.

Jennifer Coombs
Wall Street Strategies

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