Manufacturing Gets Its Groove Back

The manufacturing sector is hitting a note that’s been sorely missed in recent acts: the sound of recovery.

Data from the Federal Reserve Bank of Dallas’s latest manufacturing survey suggests the factory gears are finally humming a tune that doesn’t sound like a dirge. The production index, the key measure of manufacturing conditions, rose 16 points to 1.0, suggesting stabilization after a month of falling activity.

The index for general business activity in February increased to minus 11.3 from minus 27.4 in January, still negative but much less so.

Perhaps most importantly, the new orders index—a key measure of demand—jumped 18 points to 5.2, its first positive reading since May 2022. The capacity and utilization indexes moved up sharply, exiting the contraction territory for the neutral zone.

We heard a similar tune last week when the S&P Global Purchasing Managers Index indicated that manufacturing activity across the country expanded, with factory output rising at the fastest rate in 10 months. This was the first time in three months that manufacturing and services expanded in harmony.

Knock, Knock: Housing Is Coming Back

The housing market, not to be upstaged, is putting on its own performance. New home sales, though not quite hitting the high notes some expected in January, have nonetheless strung together a couple of months of growth. And last week we learned that existing home sales came in higher than expected.

This suggests that the chorus of doom that’s been forecasting the economic hangover from last year’s interest rate hikes might need to tune their instruments. The current score being played by the nuts-and-bolts economy—manufacturing and construction—suggests that rather than tripping over the legacies of past hikes, we’re dancing past them. Maybe it’s the whispered promises of rate cuts that’s got the economy cutting a rug, or perhaps the economy’s just got rhythm.

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The focus in the coming week will be on the Commerce Department’s report on the personal consumption expenditure price index for January. While the year-over-year metrics are expected to show a decline (thanks to the magic of base effects), the month-to-month numbers will most likely indicate that inflation is reaccelerating, following the choreography already set out by the producer price index and the consumer price index.

The Fed Question: More Than Just a Matter of Timing

The betting tables have seen some action, with odds for a June rate cut now looking less like a sure thing and more like a cautious wager. It seems Wall Street is growing increasingly skeptical about the timing of the Fed’s next move, shifting the bets further out on the calendar. The CME Group’s FedWatch tool currently doesn’t raise the odds of a cut above 90 percent until September, and it now indicates just three cuts this year with a longshot of a fourth cut.

The next move might not be to push back the timing but to cast doubt on the idea of the Fed cutting at all.

Lindsey Piegza of Stifel Nicolaus on Tuesday echoed the recent thoughts of Larry Summers, suggesting on Bloomberg TV that the Fed might have cause to raise rates this year. Like Summers and Breitbart Business Digest, Piegza is not saying that she thinks a hike is likely—just that it may be justified and is not as unlikely as the market thinks.

“At this point, I think the Fed is simply more likely to remain on the sidelines, keeping rates higher for longer rather than re-engaging in further rate hikes,” Piegza said. “But again I’m not convinced that this is the right level for the Fed funds rate in order to get us back, to ensure that we get back to price stability.”

Last year was the year of the missing recession. This year might be the year of the missing rate cuts.