Monday, August 02, 2010

ISM Reporting: Upbeat vs. "Gloom and Doom"

The upbeat version from Scott Grannis: "The ISM manufacturing index (above) was stronger than expected, and as my chart suggests, this is fully consistent with the 3-4% economic growth rate (if not more) that I've been expecting to see for the past year. It's a bit weaker than the fabulously strong levels that were showing up recently, but it is not supporting the popular "new normal" economy theory, in which growth registers a feeble 2-3%.

Most encouraging was the employment index (bottom chart above) which is still at very strong levels that have been seen only rarely in the past several decades. This is very good news, since the weakest part of the recovery so far has been jobs and business investment, and the ISM index suggests that the manufacturing sector has shrugged off this malaise quite nicely.

My thesis is still in place: this economy is growing at a 3-4% pace, which is not very impressive given the extent of the recent recession, but it is stronger than the market has been expecting, and that is enough to drive equity prices higher and corporate spreads lower.

The "gloom and doom" version of the exact same ISM report from

"The ISM Survey of the US manufacturing sector (published on Monday) offers the first reliable glimpse of activity in the US economy in the third quarter of the year. It is not encouraging.

Although the headline reading was rather better than widely anticipated (an out-turn of 55.5 compared to 56.2 in June), the details of the survey showed that new orders are now slowing markedly, and inventories have started to rise more rapidly than companies may be intending. Taken together with the GDP data for Q2 (discussed in an earlier blog), the ISM survey points to a significant danger that the US economy will continue to slow sharply in the months ahead.  Although this can be a somewhat volatile series on a monthly basis, the underlying trend in the series (also shown in the graph) is now definitely headed downwards.

It is surprising to me that the stock market has so far been so resilient in the face of the mounting weight of evidence that growth rate in the US economy has dipped below trend, with no knowing where this will end."


At 8/03/2010 5:11 AM, OpenID American Delight said...

How much manufacturing employment was rigged by Uncle Sam's bailout of Detroit/labor unions?

At 8/03/2010 7:13 AM, Blogger James Fraasch said...

The Wells Fargo/Gallup Small Business Index is at an ALL-TIME low.

That's the gloom and doom.

Geitner just got done saying that unemployment will continue to rise for the next few months.

Unfortunately, we bought the cancer and may very well be in the midst of an L shaped recession. Anyone know if we officially have ended the last one?

At 8/03/2010 7:16 AM, Blogger juandos said...

Hmmm, did Scott Grannis forget to figure in the coming costs of ObamaCare?

Obamacare Only Looks Worse Upon Further Review

Rep. Kevin Brady of Texas' 8th District notes: $569 billion in higher taxes;
$529 billion in cuts to Medicare;
swelling of the ranks of Medicaid by 16 million;
17 major insurance mandates; and
the creation of two new bureaucracies with powers to impose future rationing: the Patient-Centered Outcomes Research Institute and the Independent Payments Advisory Board.

At 8/03/2010 8:42 AM, Blogger morganovich said...

i wonder how he'll feel about the income numbers today. not only were they quite "gloomy" but the last 2 months saw significant downward revision as well.

income increased so little it is being reported as 0.0.

spending was about the same.

may incomes was adjusted down from 0.5 to 0.3.

this significantly ups the odds of a downward revision to the june GDP number.

so how is a Q2 number in the low 2's that is likely going to be revised down and was already only about 1.4% net of inventory build (a trend now subsiding or even reversing) consistent with 3-4% growth when all the signs are of a slowdown and personal income and spending have turned flat?

At 8/05/2010 2:32 PM, Blogger VangelV said...

It seems to me that most people, analysts, and politicians still refuse to look at the reality and are more interested in illusion. While the US economy can recover rather rapidly it needs to go through a liquidation phase first. Sadly, the government is doing all that it can to prevent the adjustment and intends to try the Hoover/FDR (or Japan) model by keeping lousy companies alive and creating an environment of uncertainty that discourages capital formation and job creation.

From what I see, the insanity will likely continue and will see new laws that will add liquidity in the system in order to prevent the market doing what it does best; transfer wealth from the incompetent and inefficient to effective and deserving individuals better able to utilize the scarce resources that need to be properly allocated if the economy is to recover. In such an environment it makes sense to bet against the bureaucrats and to hedge by taking positions in gold, energy, fertilizers, food, and other commodities that cannot be created out of thin air.


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