Posted in: Market News
Published:
December 18, 2019 9:39 PM UTC

Here’s Why the Dow Misread Manufacturing Data and Why It Could Come Crashing Down

The Dow could give up its recent gains as economic data will likely take a hit as Boeing shuts down production of its MAX planes.

  • The Dow cheered manufacturing data, but when GM’s contributions were excluded it wasn’t all that exciting.
  • Boeing may tank economic data in the months to come.
  • While the economy appears to be on steady ground, investors would be wise to exercise caution.

U.S. manufacturing data took the Dow meaningfully higher this week as the figures beat expectations. While factory output shows that manufacturing has roared back to life, it may not have been quite as positive as it seems. What’s more, this could be its last positive reading for some time as the sector looks likely to face several obstacles in the months ahead.

By the Numbers

On Tuesday, U.S. factory data showed that manufacturing production and total industrial production was up 1.1% in November. The rise was a pleasant surprise after September and October declines.

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Source: The Federal Reserve

November’s increase was the largest the U.S. has seen since October 2017, which sent the Dow higher in the early hours of Tuesday. While that’s certainly impressive, it’s worth noting that a big part of that increase was due to the end of a workers’ strike at General Motors (NYSE:GM). To be sure, the figures were positive on their own – with industrial production up 0.5% and the manufacturing index up 0.3% excluding the auto industry.

Positive is different from impressive, though. Excluding the impact of GM, the gains aren’t all that impressive. Of course, it’s good news to see the sector coming back from a decline, but without GM the rise still comes in below long-term trends. In fact, the long-term story is one of decline. Industrial production is down 0.8% from where it was in November last year.

Things are About to Get Worse for the Dow

Not only has the Dow been cheering inflated November manufacturing data, but the sector is poised to take a nosedive in the months ahead as Boeing (NYSE:BA) struggles to get its aircraft flying again. On Monday the firm announced it was planning to hold up production of its 737 Max aircraft in January. That will not only hurt airlines who have been counting on the plane being cleared for flight, but it will take a toll on U.S. manufacturing figures as well.

Source: Yahoo Finance

Regulators have yet to clear the MAX planes for flight, and that’s resulted in a hangar full of inoperable aircraft waiting to be delivered to Boeing customers. Up until now, Boeing continued to make the planes in hopes of regulatory clearance. But with 400 brand new MAX jets sitting untouched since the planes were grounded in the spring, BA has finally had to shut down production.

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That’s going to be a problem for the Dow, which tends to move alongside economic data. The fact that Boeing was still making planes kept manufacturing data constant. It didn’t make a major dent in U.S. GDP. If Boeing keeps its MAX production shut down for, say, an entire quarter—that will be a totally different story.

Boeing May Dent GDP

Michael Pearce, a Senior U.S. Economist at Capital Economics, says the impact on U.S. GDP will be sizable. Pearce sees U.S. GDP growth losing half of a percentage point if Boeing doesn’t restart production within the quarter. That’s just the planes themselves though. If the halted production results in layoffs at Boeing or some of its suppliers, that impact could be even larger.

Boeing’s MAX issues are larger than just the company itself | Image: REUTERS/Lindsey Wasson

What does that mean for investors? It depends on how quickly Boeing can get its MAX planes back in the sky. If the firm is going to keep production on hold for an entire quarter, investors can expect to see manufacturing figures, consumer confidence and potentially employment fall in the coming months. If that scenario plays out, traders can kiss the impressive gains they’ve seen from the Dow in recent weeks goodbye.

This article was edited by Sam Bourgi.

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Last modified: January 22, 2020 11:40 PM UTC

Laura Hoy @Laura_h_says

Laura has been working as financial journalist covering US markets for more than a decade. Her work can be found in a wide variety of publications including Yahoo Finance, InvestorPlace, Nasdaq and Benzinga. She can be reached at LMarieHoy @ gmail.com

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