Greetings, and welcome to new edition of Manufacturing Tuesday.  Normally there is a Manufacturing Monday, but sometimes we just can't get the edition out on time.  Still, the show must go on, as they say.

Now if manufacturing were a show, this would probably be either a Greek tragedy or a horror.  Because, folks, things aren't looking that great.  Some economic numbers out late last week point to industrial activity slowing down or stalling.  The current credit crisis is causing delays in payments.  Smaller industrial enterprises are suffering the most with their credit lines  cut down or completely frozen. 

By the numbers

Let me hit you with the biggest of the manufacturing econ numbers, the ISM Manufacturing Index.  The Institute of Supply Management's index is one of those "benchmark" economic numbers that the Street follows. From employment to production to supplies to inventory, ISM gets 300 non-service companies to participate monthly.

The latest ISM manufacturing survey, for September, highlighted the current scare going on throughout the economy.  August's reading had already  dipped below the neutral 50 figure to 49.9.  The latest figure saw a further drop, to 43.5, well below the 48 to 51 consensus estimates.  Any reading below 50 means a decline in manufacturing activity, though that does not mean the economy as a whole is contracting.  But of course, judging from other economic numbers, I think you could make the case that they go hand in hand.

Following this was last Thursday's release of Factory Orders.  What we have here is the twin brother of the ISM's picture.  For the uninitiated, the Factory Orders numbers are just that, new orders for durable and non-durable stuff. My only criticism of this economic indicator is that these reports are more than two months behind, so last week's report is for August.  So think of this as a confirmation or lagging indicator at best, still we should look at it.

Now going into last Summer, we noted in the past, that industrial activity was increasing.  Of course, this was well before the economic/physiological tsunami known as the "Credit Crisis" really came into the fore.  What's interesting, is that though it was perceived that industrial activity was growing, the Factory Orders report shows that the opposite was happening...and my what big change that was!  The previous month (for July) saw a 1.3% increase.  You can see the start of the worrying on credit with the consensus estimates, which ranged from a stark - 6% to only an increase of a half of a percent.  In the end, we saw a - 4% figure for Factory Orders, confirming that things were starting to go sour on the industrial sector.

Steel for a steal?

One good way to gauge the economy, is to look at certain industries and commodities.  For example rising corn and cocoa can be inflationary, as it lead to rising prices for Hershey's.  Material costs add to the overall production costs, which ultimately get passed on to you, the consumer. Saying this, prices on commodity products also reflect demand.  This is the case with steel, as the Financial Times has highlighted.

Fred Madden, vice-president for administration at Consolidated Metal Products, a Cincinnati-based car partsmaker, says his company’s steel purchases are likely to be down by 10 per cent this year from 2007, as an effect of falling demand from his company’s main customers.

“We are hoping demand will get a little better next year. But for 2009 as a whole about the most we can hope for is that our business will be flat compared to this year,” says Mr Madden.

Prices for many grades of steel have fallen substantially in the past few months. Many companies such as Mr Madden’s are putting new orders on hold, in the hope prices will fall even more during the next couple of months.

 

- excerpt from "Steel outlook falters as demand falls", Financial Times, 2008

It will be interesting to look at the upcoming earnings announcement from companies like ArcelorMittal.  Prices in other metals also give credence to steel's southward movement.  Below is a chart for London Metals Exchange's index on various aluminum.  As you can see, by the middle of the Summer, prices started to go back down.

(data provided by the London Metals Exchange, 2008)

The Trojan Horse Microchip

Now I'm going to bring up something, that frankly, I'm surprised hasn't been brought up already.  Something that is one of the most dangerous results of unfettered free trade.  What, pray tell could that be?  Counterfit microchips, semiconductors that are either half-ass knockoffs or complete non-functioning fakes!  This is almost reminiscent of previous stories of food filled with cardboard or toothpaste or dog food tainted with poisonous run off.  It's no secret that China is one of the hotbeds of piracy.  One can almost find virtually every street front venders on every block in cities like Gangzhou or Shanghai and find pirate copies of movies or music.  So it was only a matter of time, when pirating of intangible intellectual property would graduate to the physical.  Yes, there have always been knock off Pradas, but what about knock off non-functional CPUs?

Businessweek highlights such a thing.  Particularly, fake faulty electronics finding themselves in aviation products and defense systems.  You know, for years many in organized labor and various business leaders had warned that there was a tie between national security and free trade.  Well, ladies and gentlement, here is one such example to provide as proof to that argument!

The American military faces a growing threat of potentially fatal equipment failure—and even foreign espionage—because of counterfeit computer components used in warplanes, ships, and communication networks. Fake microchips flow from unruly bazaars in rural China to dubious kitchen-table brokers in the U.S. and into complex weapons. Senior Pentagon officials publicly play down the danger, but government documents, as well as interviews with insiders, suggest possible connections between phony parts and breakdowns.

In November 2005, a confidential Pentagon-industry program that tracks counterfeits issued an alert that "BAE Systems experienced field failures," meaning military equipment malfunctions, which the large defense contractor traced to fake microchips. Chips are the tiny electronic circuits found in computers and other gear.

- excerpt from "Dangerous Fakes", Businessweek, 2008.

How many military systems are infected with such fraudulent technology?  Good grief, the danger of this is on so many levels.  Brake systems in Humvees to guidance systems in helicopters may not operate because a fake chip may not function at a critical moment.  And how about espionage, as the article noted?  What's to say that there aren't systems-on-a-chip that are serving dual purposes on sensitive systems within national security? What about the domestic commercial front?  You know I bring up Hummers, yet what about brake systems in the car you drive?

This is one of the critical reasons why free trade, as it is, must be stopped.  This is why there must be better oversight in examining products coming into this country.  This is why we need to start making more things in this country for this market!  I say find these unscrupulous bastards who would disregard caution and product inspection and throw them in jail, take everything that they own.  I'm sorry, but this is also another symptom of the broken system of defense product procurement.  We need an overhaul of how things get purchased by the Pentagon.