Are dry bulk shippers braving favorable economic waters? (Part 2 of 8)
Manufacturing often precedes economic expansion and contraction. Because manufactured goods like cars, airplanes, sofas, robots, and computers cost more than salon bills or restaurant and bar checks, people make these purchases when the economic outlook is turning up—and they avoid them when things are looking grim.
As the manufacturing sector is sensitive to economic conditions, what could be better than talking to purchasing managers—whose task generally involves negotiating prices and contracts and forecasting demand—in order to get a feel for how the economy’s doing? Luckily for us, the government sends out a survey every month to key personnel to assess their perception of the overall economy.
Purchasing managers’ index
Managers are asked general questions like whether new orders, production, raw-material inventories, hiring, and shipments are up, unchanged, or down—without being asked for hard numbers. These responses (soft data) are aggregated to create an index that ranges from 0 to 100, with 50 often considered by many economists, analysts, and money managers to be the cut-off point for expansion (50 and above) or possible contraction (50 and below). The farther the number is from 50, the stronger the expansion or contraction.
Less optimism, but not the end of world
Purchasing managers in China were less optimistic in December compared to November, with the overall PMI falling from 51.4 to 51.0. Figures for new orders (a leading indicator), output, stocks of major inputs, employment, and suppliers’ delivery time all saw lower figures, confirming that China has entered a period of slower growth relative to its past. December’s figure wasn’t exciting, as the Chinese market sold off on the new release. This could add some selling pressure to dry bulk shippers for a while. But notice how new orders remain above the overall index, which suggests that demand remains pretty good. If orders and the overall index fall together, like they did in 2008 and 2011, they raise a red flag. With PMI still above 50, China is just doing fine. As Leonardo da Vinci says, “Simplicity is the ultimate sophistication.”
Browse this series on Market Realist:
- Part 1 - The must-know economic currents that affect dry bulk shippers
- Part 3 - Why China’s manufacturing PMI falls while global PMI rises
- Part 4 - China’s key economic conditions: Industrial and electricity output
- Personal Investing Ideas & Strategies