Monday, February 1, 2010

ISM indices are very bullish




The Institute for Supply Management's indices of manufacturing activity are full of V-shaped recovery signs. To be sure, these are diffusion indices, so they don't measure the strength of the rebound in manufacturing conditions; they measure instead the breadth or scope of the improvement. For example, the first chart tells us that 58.4% of those surveyed reported seeing increased activity. In an historical context, this is quite an impressive number, and it has coincided with GDP growth of 5% or more—which is exactly what we saw in Q4/09. But whereas recovery skeptics dismissed the Q4 growth as mainly due to a decline in the pace of inventory liquidation, the ISM numbers are saying that the strength of the recovery is more impressive than the latest GDP statistics suggest.

It's noteworthy also that the prices paid index has jumped to 70, which means the vast majority of businesses are paying higher prices these days. That's not exactly the sort of stuff of which deflation—still a popular theme among the recovery skeptics—is made.

I'd say the economy is in classic recovery mode, and deflation is history. This is reason for great cheer, even if Obama's $3.8 trillion budget proposal is an abomination. More on that later.

6 comments:

brodero said...

The 12 month moving average of the new orders to inventories differential is now above +15....
we have always had positive job growth when this differential has entered this territory which has been only three times over the last 40 years....

Benjamin said...

I don't understand the "double dip" crowd. What is the reasoning behind this outlook?

Seems like we are recovering from a near collapse. What is similar today to the last double dip, back in the early 1980s?

brodero said...

Since the double dip in the early 80's had an inverted yield curve my
guess is the double dip crowd is putting its cards on a drop in demand brought on by a lack of job growth.....

Scott Grannis said...

There were a lot of things going on the the 80-82 period. Very tight monetary policy that started in late 79, then Carter's credit controls that tripped up the economy in 80, then Reagan's decision to phase in tax cuts in 81 (which was later reversed).

One thing that might justify a double dip scenario is a big increase in taxes early next year. Already the prospect of higher taxes is helping the economy this year since people are accelerating income and the realization of gains. That "borrows" growth from next year.

I will be very surprised, nevertheless, if job growth doesn't show up pretty soon. With everything else on the mend, businesses will soon have no choice but to start hiring. Jobs come after growth starts.

Benjamin said...

Would be nice to see job growth in USA.
BTW, China is getting huge construction contracts from Saudi Arabia, reported today
China's economy growing like gangbusters, and global growth looks good.
We have entered a new phase--solid global GDP growth, independent of US growth.
Hopefully, a strong global GDP can help the USA, although I think all we export is debt.

Charles said...

There are several recessions going on simultaneously: construction, the effect of reduced wealth on consumption and inventory adjustment. Inventory adjustment is complete. Construction will not recover for five years. Consumption will remain depressed until savings are rebuilt. Micro-economic policy and uncertainty is very negative for investment so it will take much longer for consumption to recover fully. We should see a few quarters of rapid growth followed by a slowdown with unemployment stabilizing at very high levels.

A double dip is unlikely because the economy has had plenty of time to adjust to the fallout (past present and future) from the financial panic and the housing collapse.

Nothing would help the economy back to full employment more than a reversal of the Democrats micro-economic policies and an long range plan to decrease the burden of the public sector on the economy.