Industry Slips, Gold Wins

Industry Slips, Gold Wins

The Purchasing Manager's Index (PMI) for January slid to a 51.3 on the established scale, falling off a robust 56.5 in December. Readings above 50 indicate expansion, below 50 contraction. This comes as no surprise, although many experts were predicting better numbers, if not as strong as December's. There has been plenty of news that inventories were nearing their highest levels since the end of the recession. It is reasonable to trim late in the year. 

The report additionally reflected that new order growth fell at its fastest rate in 33 years, with that portion of the index dropping to 51.2 from 64.4 in December. The employment index fell from 55.8 in December to 52.3, the weakest since June.

This caused the equities indexes to crater and gold to rise on safe-haven demand. India also lowered its import tariff on precious metals, giving another boost to gold, in particular. 

The question is whether the decline in U.S. manufacturing is a one-off event or a sign of a new trend. By contrast the eurozone showed better than expected manufacturing data, although China's manufacturing showed further signs of weakness. 

The Dow was down almost 2%, the S&P 500 index lost over 2%, while the NASDQ slipped 2.5%. Crude was down nearly a percent and the yield on the 10-year U.S. Treasury bond dropped to lows not seen since mid-September. 

However, they also warned that the economy was perhaps establishing a new equilibrium after powerful growth in the second half of 2013.

We are left to point the finger at the premature tapering of QE3. March or April would have been time enough to let the economy take its course and then to cut paper purchases by the Fed. 

The coming week will be packed with economic news. 

Late Monday, new vehicle sales will be reported, and one can safely assume those figures will point down.

On Friday, the U.S. Department of Labor releases its January employment report. 

In between, the NY State PMI is to be released - usually a bell-weather for service industry growth - and the private employment monitor ADP will issue its employment report. There will also be a host of overseas data released in Great Britain and on the continent. 

A theme that we discussed often through the middle of 2013, infrastructure investment, is something that needs to be revisited. As we said for months, high speed Internet service; work on bridges, tunnels and roads, and school building are just some of the items that need urgent attention and will create jobs.

Regardless of charges of socialism or ineffectiveness (both of which are generally untrue), QE depends on the trickle down theory. It's hard to keep voting for it when the money that banks and financial institutions have received via the third round of easing is simply sitting in reserve at - as you might expect - the Federal Reserve. 

That cash on the ledger doesn't do many people much good sitting around practically idle.