“The wheels have come off this quarter.”
“The sky is falling” is the perfectly-on-the-mark technical expression by the good folks at the Institute of Applied Research, which publishes the Purchasing Managers’ Index for the Inland Empire – the only manufacturing PMI in California. The Inland Empire is the third-most populous region in California and a big manufacturing and warehousing hub that includes the city of San Bernardino which filed for Chapter 9 bankruptcy in 2012.
So the Inland Empire is a good gauge of manufacturing in the rest of California.
Back in 2009, during the depth of the Financial Crisis, the PMI report for February had produced a terrible score of 34.7 (below 50 = contraction). But in March, the index jumped to 45.2, still in a sharp contraction, but less catastrophic than in February. So the Institute of Applied Research endowed its March PMI report with the title, “Perhaps the Sky is not falling.”
Now we’re back – right between these two Financial-Crisis months. Only this time, it’s going in the wrong direction.
The IAR already issued a warning in its September report, with a hesitation. “We are not yet ready to say that ‘the sky is falling.’”
At the time, the Inland Empire PMI had dropped to 44.1, below 50 for the second month in a row. But the report pointed out that “the sky is falling” doesn’t apply until the index is below 50 for three months in a row; given the index’s volatility, it takes that long to establish a trend of contraction.
So that third month below 50 promptly arrived in October – “for unknown reasons, the worst month in memory,” as one of the executives on the panel called it.
Then in November, there was an uptick above 50, in line with the volatility of the index, or perhaps due to a statistical quirk – because based on the just released December report, the sky is now truly falling.
The PMI for December plunged to 42.1, the lowest level since the above mentioned dark days of February 2009.
The report pointed out that the national manufacturing PMI released on January 4 had also plunged to the worst level since 2009. And the report then linked the manufacturing PMI to the overall economy:
A PMI below 43.1, over a period of time, generally indicates a contraction of the overall economy, and a figure below 50 indicates weakness in the manufacturing sector. This month’s PMI is below both benchmarks. If the index remains this low for the next two months, a trend of contraction in the Inland Empire economy will have been established.
This is how manufacturing – though it only represents a small portion of the services-oriented economy – drags down the overall economy.
Everything was crummy in the report. The two crucial components, New Orders and Production, plunged below 40 – to 37.9 and 39.4 respectively – and the Employment index plunged nearly eight points to 40.9. Inventories also dropped, as did Commodity Prices and Supplier Deliveries, a measure of how busy suppliers are, and they aren’t very busy apparently.
By now, optimism about future general business conditions affecting their company in the coming quarter is fading: 28% of the executives said the economy would get even weaker and 59% said it would stay the same – the “same” being a manufacturing sector that is in the worst slump since February 2009 and is now feverishly trying to dodge the falling sky. Only 13% said it would get stronger, down from 31% in November.
Their individual comments included the good: “December was the best sales/shipment record in 7 years”; the bad: “Slight increase in orders but still very slow”; and the ugly: “The wheels have come off this quarter. Bookings are off 50%. We are going to have a serious lay-off in January if things don’t pick-up.”
The report cautioned that there is “often” some seasonality in the index with a weakening trend in November and December. But wait… November had been the best month since July, and the only month in the past five above 50! So the report warned that the decrease in December was “especially sharp,” which doesn’t leave all that much hope that seasonality will just change course and restore the rosy scenario that folks clung to before everything came unglued starting last summer.
The report concluded:
In summary, this month’s figures mirror the national stats reflecting weakness in the manufacturing sector. This is especially troubling since 4 out of the 12 PMI figures in 2015 were below 50, and now the PMI is low enough to indicate difficulties for the overall economy as well as the manufacturing sector.
Other elements of the California economy are struggling too, even in Silicon Valley, as Yahoo tries to “quietly” dump its Holy Grail new-headquarters property. Read… It Starts: Tech Trouble Mucks up Silicon Valley Real Estate Party