• New orders in flyover states are white hot. This is a footprint for US manufacturing larger than Texas and four-fifths the size of California’s.
• 3M is a bellwether that should tell us about US manufacturing new orders, not just those in Midwest flyover country.
• 3M is not a one-for-one guide, but there’s no argument from its guidance: the white-hot manufacturing sector is cooling.
• Jay Powell is hoping he can get the fed funds rate to 2.0%. But that implies 3M is sending a false signal and the economy and markets can withstand two more rate hikes between now and September.
• On a fundamental level, a classic flight to the safety of Treasuries poses equally severe risks of capital flight as global growth slows.
New orders hold most-favored-indicator status for forward guidance on US economic growth. If you drew a heat map of the US, you’d find really hot spots for new orders in the Philly Fed District and a great swath of Midwest flyover states like those covered in the Kansas City Fed manufacturing survey and in the lesser known Creighton University Mid-American Economy Index.
How hot are new orders in the flyover states? White hot. In terms of z-scores, or standard deviations from the mean, we’re talking north of 2 – beyond outlier status. The Kansas City Fed New Orders index printed at a near-record 38 in May, registering a z-score of 2.4. The Mid-American States New Orders index printed at a record 78.4 in May; its z-score came in 2.6.
The Kansas City Fed and Mid-American surveys never move markets. Consider them to be the Rodney Dangerfield of regional manufacturing surveys. But the states covered under their combined umbrella comprise a footprint for US manufacturing larger than Texas and is four-fifths the size of California’s.
You can’t put too much weight on soft survey data produced by academic institutions, right? Well, if you want to go there, then let’s put a face on Flyover land’s manufacturing complex: 3M, or the artist formerly known as Minnesota Mining and Manufacturing.
If you want its Street cred, just read Bloomberg’s company description: “3M Company conducts operations in electronics, telecommunications, industrial, consumer and office, health care, safety, and other markets. The Company businesses share technologies, manufacturing operations, marketing channels, and other resources. 3M serves customers worldwide.”
A bellwether like that should be able to tell us about US manufacturing new orders, not just those in Midwest flyover country. It can. 3M’s stock price gives forward guidance for the bluest of blue-chip global manufacturing indicators, the ISM Manufacturing New Orders index.
A recipe that delivers 3M’s current message: Grab a couple of filters. First, normalize 3M’s stock price into natural logs. Second, take the deviation from the 12-month average. Overlay ISM New Orders. Bake at 350 degrees for 25 minutes. Let stand and cool. Enjoy your higher-beta guide for ISM New Orders.
3M is not a one-for-one guide. But there’s no argument from its guidance: the white-hot manufacturing sector is cooling. Financial markets treat ISM New Orders as a growth proxy. And the slower growth signal 3M is sending for ISM New Orders is unmistakable. U.S. Treasury yields are headed lower and US rates and investors should expect the yield curve to undergo a bull flattening.
No doubt Jay Powell, who founded the Industrial Group in his time at the Carlyle Group, would have the best grasp of the implications 3M holds for the real economy. Will this stay the Fed’s hand? Powell is hoping he can get the fed funds rate to 2.0%. But that implies 3M is sending a false signal and that the economy and markets can withstand two more rate hikes between now and September.
An ISM New Orders dive to the 50-level, the dividing line between expansion and contraction, would at the least put the Fed on hold. A sub-50 plunge would flag a recession and flip the yield curve from a bull flattener stance to that of a bull steepener.
A decrease in Treasury yields and a Fed pause imply a weaker dollar and therefore a reprieve for the Emerging Markets complex that has proven it’s highly sensitive to a strengthening. But on a more fundamental level, a classic flight to the safety of Treasuries poses equally severe risks of capital flight as global growth slows.
The markets’ recent reprieve is tied to the shared view that U.S. growth will offset the other deflation, as in the air coming out of the global reflation trade. This comforting consensus will shatter though if the most attractive horse in the glue factory, the U.S. economy, is finally headed to slaughter.
-Danielle DiMartino Booth