Monday, August 3, 2009

ISM July index signals recovery

"Green shoots" have been popping up for the past several months, suggesting the recession was ending, but the July ISM manufacturing index released today makes it conclusive. News reports characterize the index reading of 48.9 as an indicator that the economy is "shrinking at the slowest pace in 11 months," (because a reading of less than 50 is thought to indicate contraction) but as this chart shows, an index reading above 46 is consistent with an economic expansion. If the correlation shown in this chart holds, then the economy is on track to grow 2% (on an annualized basis) in the current quarter. Most of the components of the index released today also are consistent with recovery.

The recovery is now in the virtuous cycle phase, as good news like this will boost confidence, and with the return of confidence we will see more precautionary balances being spent (i.e., rising money velocity). More spending and investment in turn will boost confidence further, etc. Very bullish.

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