Fall Factory Data Flout False Fears

Little noticed amid midterm election noise, a slew of global manufacturing data recently rolled in. In aggregate, they point to broad resilience. Between purchasing managers’ indexes (PMIs) and durable goods and factory orders, the latest monthly data suggest the world’s factory sector is mostly expanding—overcoming input cost fears. This should continue aiding growth while false price fears keep sentiment in check.

Take S&P Global’s October manufacturing PMIs, surveys tallying the breadth of growth. This week brought new data for the US, UK, eurozone, Japan and China. Among these, only Italy and France fell below the 50-line separating expansion and contraction.^[i] While shifts from September’s readings varied, all other places exceeded 50—expansion!

Now, there are some asterisks worth mentioning. One, PMIs measure only growth’s breadth, not its magnitude. A reading above 50 means the majority of firms reported growth, while below suggests contraction. However, a minority experiencing contraction can outweigh an expansionary majority (and vice versa), given sufficient magnitude. Two, China’s official PMI, which gauges activity among the country’s larger, state-owned firms (versus S&P Global’s RatingDog PMI covering smaller, private firms) also slipped below 50, joining France and Italy.

Still, the majority of manufacturers across a huge chunk of the global economy report expansion. And the forward-looking New Orders subindex exceeded 50 everywhere except France and Italy.^[ii] Today’s orders are tomorrow’s production, so this bodes well for future factory activity. Other fresh data support this. September US core capital goods orders (which remove volatile defense and aircraft spending) were revised up to 0.6% m/m—their fifth consecutive monthly rise.^[iii] Total factory orders’ 1.8% m/m beat expectations.^[iv] Overall, these data are pretty growthy.

To hear the common narrative, that is all well and good—but growth is all about AI. And recent volatility and election results call that into question. It is true PMIs noted strong demand for AI-related infrastructure. The US, UK and Japan, for instance, both cited strong AI goods and equipment orders as tailwinds. American purchasing managers even noted struggles to keep up with related demand.^[v] This could reinforce existing concerns around lofty-and-growing AI and Tech capex as borrowing costs add pressure on already questionable future revenues. But these data simply confirm what many already knew—AI-related investment is strong.

Bigger picture, though, growth wasn’t limited to AI. For instance, Germany and the US reported strong government investment in defense, public infrastructure, municipal water systems and mining equipment.^[vi] Production growth also spanned all categories (consumer goods, intermediate goods and investment goods) in the UK and China’s RatingDog survey.^[vii] Echoing America’s Q3 GDP, this cuts against claims business investment is funneling solely into AI infrastructure.

Most purchasing managers decried rising input costs, grabbing some eyeballs. But this, too, is a false fear. We don’t dismiss that today’s higher energy costs pressure some manufacturers. Oil and diesel are key inputs worth weighing. But … is anyone surprised? Oil has been one of THE stories this year, tied to the Iran war. Surprises sway stocks most. Yet these fears dotted headlines since the war’s start eight months ago, an eon for stocks. Factories have gotten pretty good at adapting to them, too. For example, purchasing managers in Germany, Spain and Japan reported stockpiling in October to avoid paying potentially higher transport costs ahead.^[viii] Anticipation is mitigation.

Plus, we doubt these issues broaden from here. For one, energy inflation shows few signs of spilling into other goods and services. Examples abound. And not just in major data releases. For instance, a new Bloomberg inflation index showed earlier this week that price pressures are mostly energy related.^[ix] Or consider the Bank of England’s new “sticky-central” inflation gauge, which aims to track underlying inflation by giving more weight to infrequently changing prices and key production inputs.^[x] It, too, points to benign non-energy inflation. (The BoE nonsensically hiked rates Thursday anyway, but we can’t—and won’t—vouch for its rationality.) And should oil prices cool—which seems likely, tied to extant workarounds and better-than-appreciated supplies—these pressures should abate further.

In concert, these reports point to an expectations-reality gap in the global manufacturing sector. Orders and production are growing within and outside AI, while price pressure fears help keep expectations low. It amounts to a bullish disconnect in the factory space.