Chicago PMI decreased by 3.9 percentage points to 43.2 in October from September’s read of 47.1, which was well below the market consensus of 48.0. The headline “biggest drop in 39 years” probably triggered more algorithm selling than the actual data, which was contraction, and expected; although, I think the estimates were too high.

The 43.2 read for October is the lowest level since December 2015.  The three-month average fell further to 46.9.

Ironically, only two of the major components saw a monthly decline, although both New Orders and Order Backlogs fell sharply in October.

• New Orders declined to 37.0 (lowest since March 2009)
• Order Backlogs dropped by 13.6 points to 33.1.

Two other key components were slightly higher.

• Production bounced up to 46.8
• Employment increased by 4.2 points to 49.8.

October’s Special Questions

  “What impact the latest interest rate cuts by the Federal Reserve have on firm’s business?”

• 51.1% expect no impact
• 31.1% state a positive effect

“How the government imposed tariffs will affect their firm’s business?”

• 56.5% noted a little negative impact
• 26% indicated a major negative effect

Conclusion

I found the answers to the special question intriguing.  Ironically, I would have preferred a higher percentage to express China trade concerns...makes me wonder if something else more woven into fabric of economy is an issue.

The bottom line is manufacturing is critical, although many feigning concerns may be overstating just how important the industry is versus its historical context.   This is why the trade fight was so long overdue. 

For now, we are pulling back from levels Americans were told we could never achieve in the first place.

Role & Impact of Manufacturing

The record high Chicago PMI read was 78.6 back in January 1973, which underscores the fact manufacturing had been hollowed out tremendously in large part to unfair trade practices in China and to a lesser degree automation.

So now, manufacturing is the smallest share of overall U.S. economy in 72 years, and even the recent revival couldn’t stop the slide (as the boarder economy grew faster).

Manufacturing, which slowed dramatically after peaking in 2014, staged a strong rebound in 2017 and 2018.

 

Remainder of the Session

The market has tried to climb off the lows of the session, but with the jobs report and more manufacturing data out tomorrow morning, very few are taking the bait.  Interestingly, facts and fundamentals are being overshadowed mostly by negative speculation, which means great opportunities are being created.

On that note, reactions to earnings misses triggered severe selling.  Much of the selling is excessive, but to rush into those names now would be too risky.  There are enough earnings winners to buy on dips. 

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