Market Overview

US Factory Output Dropped Like a Rock...Blame Chevy?

Once again, the sagging housing market strikes a blow on the American economy's recovery.

According to Thursday's report from the Federal Reserve, U.S. manufacturing output fell in November for the first time in seven months. The culprit? Factories made fewer automobiles than they had been, although that isn't the entire story. Production of home electronics, appliances and business equipment also dropped.

Most economists and even some of the other Fed banks differed on how important this month's number is.

"One month is not a trend," said Dan Greenhaus, chief global strategist with BTIG LLC. Perhaps the increases over the last seven months made a one-month drop inevitable. Add in the impending holiday season, as well as Thanksgiving's effects, and perhaps this month IS just an aberration.

After all, recent data from regional Fed banks suggested that manufacturing grew sharply in both the Northeast and Philadelphia region in December. This backs up the thesis that November's numbers are just a blip.

The decline in auto production is actually surprising, considering that automakers reported strong sales for November. Chrysler, Ford (NYSE: F), Nissan (NSANY) and Hyundai showed double-digit gains, which makes it a bit odd to say that November manufacturing was down. Unless carmakers see a dip for December and January, and therefore are simply not replenishing inventory, it's hard to see November's number as anything other than a one-off event.

Apparently, experts agree with me.

"As long as auto demand is strengthening, the prospects for auto production remain good, and this month's slump should prove an aberration," said TD Economics economist Alistair Bentley in a research note.

Not everyone, however, is aboard the "it's not a big deal" bus. Some economists, for example, argue that factory numbers might well decrease in the coming months. They say so with the thesis that European debt might bring on a strong recession in the region, and growth might slow (either on its own or by China tapping the breaks to ease inflation), which could drive down manufacturing numbers again.

"That's pretty much the worst combination you could hope for as far as manufacturers are concerned," Paul Ashworth, chief U.S. economist with Capital Economics.


ACTION ITEMS:

Bullish:
Traders who believe that manufacturing numbers will bounce back and rise might want to consider the following trades:
  • Buy automakers such as Ford (NYSE: F). Ford's been on a roll lately, and could continue its strong run in the future.
  • Manufacturing can be influenced by construction, particularly if that construction is geared toward building office space or homes. Look at companies like Caterpillar (NYSE: CAT), who might benefit from an upturn in construction.
  • Manufacturing can also be a proxy position on the US dollar. If manufacturing is high, that can sometimes indicate that exports are up. If exports are up, chances are that the USD is down or weaker. Forex traders might have a play there.
Bearish:
Traders who believe that these numbers are a sign that things are headed down again may consider alternative positions:
  • Gold, gold, gold. Bad news is almost always a flight toward gold, isn't it?
  • Stick to safe stocks, if you insist on stocks. Look for companies that sell the basics and are sound fundamentally, such as Kraft Foods (NYSE: KFT).
  • If you're truly anxious about the economy, you might not be alone. Consider investing in Pfizer (NYSE: PFE) which makes Xanax — my drug of choice when life has me upside down and shaking.
Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.

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