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Recovery for the Manufacturing Sector Is Not Yet in Sight

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The U.S. economy continues to grow (albeit at a snail’s pace), but Russ discusses why investors ignore the manufacturing recession at their peril.

The sharp rebound in stocks since February supports the view of market optimists: The U.S. is not in or on the cusp of a recession. The broad U.S. economy continues to expand, albeit at a sluggish pace.

However, allow me to take the “glass half empty” view, and note the manufacturing sector has yet to recover from the slowdown that began in late 2015. And this has important implications for investors.

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Market Realist – US economy continues to expand gradually, although manufacturing is still a concern

Data from the United States Department of Commerce showed that the US GDP increased by a mere 0.5% in the first quarter of 2016, following a 1.4% growth in 4Q15. This growth rate was less than 0.7% of the growth projected by economists and was the slowest in the last two years.

The weak growth was mainly attributed to lower consumer spending, unstable global markets, and the decline in crude oil prices. These resulted in a huge decline in business investment, especially from energy-related companies. Additionally, weak global demand coupled with a strong dollar negatively affected exports. A strong dollar means US goods are relatively expensive in global markets, thus affecting the top line of many US multinational companies.

While all is not rosy with the US (IWM) (IWD) economy, it’s not on the verge of recession. Rising job growth should propel consumer spending (XLP) (VDC) and housing to a higher growth trajectory. The Federal Reserve believes that strong job numbers and wage growth could boost economic growth.

Manufacturing is in the doldrums

Manufacturing growth as measured by the ISM (Institute for Supply Management) index ended lower for the fifth consecutive month at the end of February. However, it rose to 51.8 in March from 49.5 in February. The index declined again in April to 50.8, well below the estimate of 51.4. An ISM above 50 indicates growth.

The manufacturing sector posted a steep loss of 29,000 jobs in March and 18,000 in February, wiping out all the previous year’s modest gains. However, in April, the sector added 4,000 jobs. This is in stark contrast to a healthy job market led by improving demand for homes, healthcare services (IXJ), and hospitality.

In the rest of this series, we’ll look at the link between industrial production and corporate profits. We’ll also touch on how the profits recession reflects a broader sluggishness in the economy. We’ll end the series by looking at the effect of the manufacturing slump on value stocks.

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