The global manufacturing surveys we just received for February show encouraging signs of stabilization, driven by China’s reopening. Consumer confidence and weekly jobless claims are also consistent with further economic growth.

However, the rate at which inflation is falling looks to have slowed. This implies more interest rate hikes by the Federal Reserve that remain a headwind for stocks. While the stabilization in cyclical stocks’ performance is encouraging, the outlook for profit growth is weak while market valuation is above long-term averages. In summary, we remain neutral on our outlook for stocks.

Global Manufacturing Survey Signals Return to Growth

The February J.P.Morgan Global Manufacturing PMI (a timely global business survey) signaled a return to growth for the global manufacturing sector. Output rose for the first time in seven months amid improving supply chains and China's re-opening as COVID restrictions were lifted. Business optimism also revived, rising to its highest level in a year.

The upturn in production was led by Asia, with Thailand, India, and the Philippines registering the fastest rates of growth. The region also benefited from the ongoing re-opening process in China, where output rose for the first time six months.

U.S. Manufacturing Slowdown Eases

The ISM Manufacturing PMI (a timely business survey) picked up in February but still indicates contraction of factory activity, albeit at a slightly slower pace. It remains consistent with subdued manufacturing output growth, as well as sluggish overall economic activity. The ISM estimates that the latest PMI corresponds to a 0.3% decline in annualized economic growth.

Of the 18 ISM industries, 14 contracted while four expanded, which was a modest improvement from two industries reporting growth in the prior month. Similar to the overall PMI, this suggests some softening in the pace of decline in factory activity.

Most individual activity indexes remained in contraction territory. New orders rebounded the most since October 2020, but still showed shrinking demand for the sixth consecutive month, albeit at a slower rate. The readings of the supplier deliveries index over the past three months have been the lowest since March 2009, and consistent with falling inflationary pressures. The ISM Prices Index, however, picked up as input costs increased. It suggests that the disinflationary process may slow down, as has already been evident from recent CPI and PCE inflation readings.

Consumer Confidence Declines but Consistent with Further Growth

The Conference Board’s Consumer Confidence Index fell for the second consecutive month in February. While the index is well below its cycle high in mid-2021, it has been range-bound over the past several months and is holding up well above the lows during the pandemic. The current level is consistent with a continued economic expansion.

Consumers felt better about the present situation, with that index component up to its best level in 10 months. Current Business conditions were broadly viewed as neutral.

Consumer expectations, however, dropped to a seven-month low and near the worst level since March 2013. Expectations for jobs, business conditions, and incomes all worsened from the prior month. Bigticket purchasing plans for the next six months declined. Plans to buy a home, vehicle, or major appliances all fell from the prior month, in contrast to positive seasonal tendencies.

Importantly, consumer inflation expectations for the year ahead peaked in June 2022 and continued to ease. Although still higher than pre-pandemic, they are now at their lowest level since April 2021.

Jobless Claims Continue to Signal Tight Labor Market

We pay close attention to weekly jobless claims, which are a timely and accurate economic indicator. Claims edged down to 190,000 last week and remain low for this cycle and compared to historical norms, consistent with a robust labor market.

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