Monday, February 02, 2009

Half Empty Or Half Full Manufacturing Surveys?

Was the global manufacturing surveys good news or bad news? That seems to be something of a "Do you believe the glass is half full or half empty"-question. In almost all countries, the index was higher in January than in December. But in all countries, it remained well below the 50 threshold for growth versus contraction.

As it happens, both interpretations were right-though the "half empty" crowd slightly more so. The reason for that is that we know this means for certain (assuming the surveys are correct. But if they're not correct, then that diminishes the "half-full" interpretation just as much) continued significant contraction.

The case for the "half full" interpretation lies in that this could (with emphasis on could) be the first step towards a recovery. Rarely, if ever, do these indexes go from say 35 to 55 in a month. Instead, during shifts from expansion to contraction and vice versa, they move gradually a few points up or down. So this moderate uptick is exactly what we would expect to see if this was the beginning of the end of the slump. And that is what the case for the "half full" interpretation lies in. The problem is that while we know a index value of 35 implies contraction, we don't know for certain whether an index movement from 32 to 35 is the beginning of a recovery, or a false signal that will be followed by a decline back down to 32 again. Thus while a recovery will almost necessarily be reflected in a moderate uptick, it is not equally certain that a moderate uptick really reflects a recovery. We'll have to wait for coming reports to see this.


Blogger said...

A move from 32 to 35 is really not the beginning of a recovery. While a recovery may start when the manufacturing index is below 50, a value of 35 still means that roughly 2 out of 3 people questioned believe their business is still contracting. Even if you take into account that optimism takes a bit of time to spread, you cannot argue that people are overly pessimistic when the gloom is that widespread.

Imho the uptick is due to the credit crunch indicators that have shown improvement of late. I don't expect a reading above 40 for the next 6 months, since the self-feeding consequences of the recession still have to kick in.

10:25 PM  
Blogger stefankarlsson said...

Marc, I explicitly pointed out that an index value of 35 still means contraction-and a significant one. But the point was that a recovery never goes from 32 to 51 in a month, so when there is a recovery (not necessarily, but possibly now), we will see a move similar to this one.

10:56 PM  
Blogger happyjuggler0 said...

I honestly don't see how this can be viewed as "half empty". At best it is positive, at worst it is indeterminate (i.e. white noise).

As you pointed out, we never have moves from 35 to 51, it is a much more gradual process. So while 35 still means contraction, we pretty much knew from historical pattern that it would be significantly under 50, so it can hardly be "half empty".

5:22 AM  

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