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Manufacturing survey numbers 'Surpise' to the upside, but they shouldn't

Both the Markit and the ISM Manufacturing Survey came in higher than expected in the January 2020 report. That is viewed as a 'surprise', but it shouldn't be. With the expected resolution (at least partially) of the tariff battle with China, full employment, wages rising, and NO build in inventories over the last 9 months, it was only a matter of time before we saw manufacturing increase.

US Consumer Spending has been growing steadily over the last year. With unemployment at historic lows and wages for workers rising the fastest in decades, retail sales have been solid to strong. In fact, we believe that in the 4th quarter consumer spending may have been held down by a lack of inventories.

The 'law of supply and demand' rules all markets (someone might want to tell Bernie Sanders). We certainly have demand in the US given the low level of unemployment and rising wages. At the same time, we've seen no increase in supply and given the increased sales one can make the case that supply is now lacking.

One way we measure supply is to track Wholesale Inventories. These inventories give us an idea of what is 'in the pipeline' as compared to what is 'on the shelves' and in doing so, point to what the supply situation is going forward versus the present. The last 9 months have shown no increase in these inventories while sales were solid and growing.

Wholesale Inventories:

Therefore, an increase in manufacturing to meet increasing expected demand shouldn't be a surprise, it is just an outcome of supply and demand.

We'll be watching the freight and housing numbers closely going forward. We forecasted economic acceleration based on jobs and wage increases, low inventories requiring an accelerated 'build', and a likely homebuilding surge to cover a housing shortage as Millennials become fully engaged by Life Cycle Theory. We believe we're seeing indications of just that with these manufacturing reports and the recent stronger housing numbers. We'll be watching for an increase in freight movement will confirm our expectations.

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