NEW YORK (
) -- Some people are taking a promising trend over the past two months in U.S. factory activity as an indication of a sustainable recovery for this artery of the economy, but they are wrong.
The Federal Reserve Bank of Philadelphia has reported that its general economic index that measures manufacturing in the Philadelphia area rose to 14.1 from 4.2 in August, marking the first back-to-back monthly growth since 2007.
In addition, the Federal Reserve Bank of New York reported a similar trend in manufacturing activity in New York. Nationally, industrial activity rose by 0.8% in August beating analyst expectations of a rise of 0.6% after a 1% rise the previous month.
Most think that this is great news because it indicates that business are loosening the grip on their wallets and starting to spend. However, when dissecting the numbers a bit more, they can be deceiving. The increases in manufacturing can be attributed to the following two reasons:
- Many businesses were implementing extremely lean measures at the end of 2008 and the beginning of 2009 that resulted in limited supplies of inventory. As these inventories started to deplete, businesses were forced to start purchasing and restocking to meet minimum inventory levels so overall business operations would not be affected.
- The success of the "cash-for-clunkers" program. This government program not only sparked sales in the automotive industry but also ramped up overall production of automobiles.
As businesses replenish their inventories, they will do so only to a level to maintain business operations, but not add excess inventories. Most businesses are still wary of the overall health of the economy, as evidence in the unemployment numbers.
Although the number of workers filing for initial jobless claims has fallen, the number of Americans who continue to claim file claims continues to rise. This means that businesses still not ready to hire and grow.
Secondly, with the end of the "cash-for-clunkers" program, there are no real incentives for consumers to purchase new vehicles. Consumers will not make large purchases, like buying a car, until they are certain about the labor markets.
In sum, U.S. manufacturing has seen a nice trend, but it will be very difficult to sustain these levels until the labor markets improve. Some equities that have benefited from this trend are:
iShares Dow Jones US Industrial
, which closed at $51.81 on Wednesday. It is up 32% from a July 8 close of $39.22.
Vanguard Industrial ETF
, closed at $50.98 on Wednesday. It is up 33% from a July 8 close of $38.22.
Keep in mind that investing in these ETFs have inherent risks and a good way to mitigate these risks is through the use of an exit strategy.
According to the latest data at www.SmartStops.net, an upward trend in these ETFs could come to an end at the following price levels: IYJ at $48.74 and VIS at $47.97. These price levels change on a daily basis as the markets fluctuate; updated data can be found at www.SmartStops.net.
-- Written By Kevin Grewal in Laguna Niguel, Calif.
Kevin Grewal is an editorial director and analyst at SmartStops.net where he focuses on mitigating risks and implementing exit strategies to preserve equity. Prior to this, he was an analyst at a small hedge fund where he constructed portfolios dealing with stock lending, exchange-traded funds and alternative investments. He is an expert at dealing with ETFs and holds a bachelor's degree from the University of California along with a MBA from the California State University, Fullerton.