U.S. Manufacturing Worse Than Services Bothers SocGen's Edwards
* Strategist sees gap signaling `deflationary shock’ from China
* `Ice Age’ outlook calls for recession, S&P 500 plunge to 550
By David Wilson
(Bloomberg) – Contraction in U.S. manufacturing is a more telling indicator of what lies ahead for the economy and stocks than the relative strength shown by service industries, according to Albert Edwards, a global strategist at Societe Generale SA.
The chart below compares the Institute for Supply Management’s manufacturing and non-manufacturing indexes, as Edwards did yesterday in a report. Both the indexes are based on monthly surveys of corporate purchasing managers.
n October, the manufacturing index was 9 percentage points lower. The gap was the widest since February 2001, a month before the U.S. economy entered a recession. Although the differential narrowed in November and December, the manufacturing gauge fell below 50, signaling a slowdown. Last month’s reading of 48.2 was the lowest since June 2009, when the latest recession ended.
Falling Chinese import prices are behind the weakness in goods-producing industries, Edwards wrote. The London-based strategist raised the possibility that China will send the U.S. and European economies “a massive deflationary shock,” paving the way for a output slump.
“When an economy is hurtling toward recession, it is almost always the manufacturing sector that takes the less volatile services sector by the hand and leads it into a recessionary underworld,” wrote Edwards, ranked first for global strategy in Thomson Reuters Extel’s annual surveys of European institutional investors since 2006.
As for stocks, Edwards wrote that he expects the Standard & Poor’s 500 Index to fall as low as 550 in the next recession. His projection is 74 percent lower than the index’s record close of 2,130.82 last May. The call is consistent with his “Ice Age thesis,” held since 1996, that economies worldwide will suffer from deflation and bonds will do better than stocks.