Monday, November 3, 2008

Manufacturing index plunges--for real?

On the surface, this chart says that we are now in a deep recession. The ISM manufacturing index reported today plunged to levels that are consistent with a significant economic contraction in the current quarter. Together with the Baltic freight index, these indices reflect a virtual cessation of activity over a short time frame unlike any we have ever seen. Is it for real? Or is it reflective of a temporary pullback by people stunned by the news of financial crisis? If world trade were to shut down, that would surely plunge the global economy into a deep recession. But has it? The slow and gradual improvement in the financial markets (e.g., the VIX is down to 55 today) says that readings such as these are temporary, and not indicative of a looming depression.

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