Is softening Purchasing Manager’s Index (PMI) data signaling the end of the economic party after a decade-long expansion? Or, do the numbers represent a temporary lull that will give way to continued growth?
While the debate is far from settled, at least one indicator suggests recent manufacturing weakness may simply reflect a pause as opposed to a full-fledged slowdown.
As the chart below illustrates, movements in the yield of the 10-year treasury have been tightly correlated with domestic manufacturing activity.
With yields stabilizing, the market appears to be signaling brighter times ahead for manufacturers if historic PMI patterns persist. A rebound could be particularly rewarding for attractively valued businesses in cyclical industrial areas of the market that already experienced a pullback when macro clouds gathered during the summer.
As value-oriented investors who have found significant opportunities among manufacturing and industrial companies, we would welcome such a development.