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Today's ISM report came in a touch weaker than the market was expecting, but as this chart shows, it is still pretty strong. (In my experience no indicator ever moves in a straight line; even in very strong economic conditions there can be the odd monthly setback.) By my estimation, the September ISM index level is fully consistent with economic growth of 3-4% in the third quarter. Note the fairly strong correlation between the ISM index and quarterly GDP growth rates in this chart.
As this next chart shows, the prices paid component of the ISM index still shows that a preponderance of those surveyed are seeing higher prices. The return of pricing power has been rather quick in the wake of this recession, another reason to call this a V-shaped recovery.
4 comments:
Scott
It's amazing to me that the 30 year is now under 4%...I hope you are right in your assessments and that the bond market is really getting this wrong right now. Bill Gross also came out this week stating his was buying the longer end treasury's as a hedge against deflation...totally different than your view. With all this debt and money printing yet the bond market is telling us something oh so different...
Scott,
Can you explain why the market reacted so negatively to an essentially positive ISM number? Is it more to do with an sense that stocks are overvalued relative to profits?
I think the market is just very jittery of late. Prices have risen so much that many people worry that things may be overdone. And there are still plenty of observers who say that the economy is going to collapse into another recession soon. So with the news failing to exceed expectations, the bears are cheering, and the bulls are running scared. I predict this will be only a temporary setback.
Jeff: Bill Gross often says one thing and does another. The most important thing to remember, I think, is that the primary argument in favor of deflation is based on a flawed theory: deflation is not a by-product of a weak economy or a below-trend economy or an economy with lots of slack. It is the result of an excess of money. And by all measures, we have an excess of money, so the chances of deflation are very slim.
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