Monday, November 1, 2010

Manufacturing report suggests stronger Q4 GDP

The October manufacturing report from the Institute for Supply Management came in stronger than expected, across the board. As this first chart shows, the level of the manufacturing index is consistent with GDP growth that is significantly higher than what has been reported in recent quarters. I believe this is one more reason (see my recent post on why the acceleration in M2 growth is another reason) to expect some acceleration in the pace of GDP growth in the current quarter. At the very least, today's ISM report provides zero evidence of any economic slowdown.

Export orders jumped in October, suggesting that the slowdown in exports which contributed to slow the economy in the third quarter is reversing in the current quarter. Growth in exports is a very positive sign, particularly since it is now still apparent that the U.S. is not going to be the engine of global growth as it has been in the past. The most dynamic engines of growth this time around are in the Asia/Pacific region and in the emerging market economies.

Fully 70% of those surveyed reported paying higher prices. This is another strong argument against the persistence of deflationary risks in the economy. The majority has consistently reported paying higher prices ever since the recession ended almost 18 months ago.

Finally, the manufacturing employment index has been at an unusually high level for the past nine months, strongly suggesting that manufacturing employment continues to expand. Growth in manufacturing employment was reflected in the establishment survey of manufacturing jobs beginning early this year, with the exception of modest and disappointing job losses in August and September. With this ISM report it is now likely that we will see renewed job growth in the manufacturing sector (and most likely more than the 1,000 new jobs the market is expecting to see) in the employment report that will be released this Friday.

Given the broad-based strength in the October ISM report, coupled with the ongoing rise in commodity prices, the weakness of the dollar, the continued growth of the economy, and the absence of deflationary pressures in the official price indices, I would argue that there is no need at all for the Fed to resort to another round of quantitative easing. Given political realities, however, they probably feel compelled to "do something." That something is likely to be a modest QE2 announcement—a hundred billion or so of asset purchases in installments—after the FOMC meeting on Wednesday.


brodero said...

Order minus inventory turned positive....we have had a negative numbers like last months and still
conitnued to grow ( example Jan. 96
and July 1984) the 12 month moving
average of the new orders minus inventories is 11.2...well above the 7.5 level to trigger a recession warnings. On the export side the export order number is particularly good for the S&P 500...40% of S&P 500 Profits come from

brodero said...

On another note...Help wanted ads
came out...4,409 million... highest number since August 2008 and the best October number since October 2007 ( which was 4.589 million)

John said...

Scott's last paragraph sums it up. The economy is continuing to recover. The equity markets are confirming the fact. The S&P 500 is up some 14% since the end of August. There will likely be some correction in the days following the election/fed meeting/employment report but it should be short and shallow. Too much money has missed the move and is not in. It will pounce on lower prices. By yearend we should be higher.

One other thing. Usually, the third year of a presidential term are good years for the equity markets. With an accomodating Federal Reserve, 2011 should not be an exception. I am looking for the equity bull market to continue next year.

Many have criticized Scott's optimistic forcasts. But from this investor's point of view, his opinions have correctly pointed to getting/staying invested in quality risk assets and not succumbing to the pessimistic fears of his critics. Speaking only for myself, his forcasts have been very beneficial.

CDLIC said...


Would you mind commenting regarding the following from a friend regarding "manufacturing report suggest stronger Q4 GDP".


"I have to remain a 'denier' of Mr. Grannis' opinion the economy has or is in recovery. I believe we're in deep poop and its soon to get so deep we will drown in it. The economic indicators Mr. Grannis notes are probably accurate (just like the indicators touted by the GW crowd, but using select data that supports one's belief, perhaps desire) but dismissing the clouds as irrelevant is a huge and fatal mistake.
Mr. Grannis' rose colored glasses conveniently block out the visible spectrum of the 800 lb. gorilla in the room, the magnitude of US debt. Sure the US government's credit card is different than yours and mine. It takes a higher debt/income ratio to make it blow up. This FY, US debt will exceed 100% of GDP and its main source of income (the taxpayer) is shrinking. And the US govt can give itself a pay raise (more taxes) to facilitate its paying down/off its debt. But when it gives itself (the employer) a raise, the employee takes a pay cut and thus has less money to put to work or put into the economy (consume). The word unsustainable describes our economic path.
Yes, WWII drove GDP over 100% but soon after the war ended there was work a plenty. What was needed then and what drove the recovery is not needed now. What are the masses going to do to generate income for themselves, their dependents? Whatever it is, it hasn't been invented yet and unless whatever it is drives the economy like a qualified driver in an Indy car on Memorial day, we're going to sit in the pits and fret. "But" says the car's owner, "we have the best and fastest race car in the field today; we are unbeatable." Then his chief mechanic points out, "we're out of fuel and can't get any. We're out of cash and our credit is no good with the supplier."
GDP is at best a marginal indicator of growth. Gross sell price by itself is truly irrelevant. Doesn't matter how much $ you sell something for, it matters only how much stays in your pocket after all expenses are paid.
Sure, stay in equities. But, have stop loss sell prices cranked into every equity position and adjust them often. The market rises while the government is successful in telling the majority what it wants to hear today and that things and times are getting better for tomorrow and into the future. They are not."


Scott Grannis said...

CDLIC: A few comments on your friend's gloom and doom:

There are many indicators which confirm the economy is recovering: personal income (now at a post-recession high and rising), equities, swap spreads, commodity prices, corporate profits, auto sales, to name just a few. He'll find many more examples in my posts.

US debt is not going to exceed 100% of GDP for a long time. The figure your friend cites is gross debt, which includes debt held by social security. The net debt figure is the better measure, and that stands currently at about 62% of GDP. It will certainly rise, but it is not yet at unsustainable levels, fortunately.

If the next Congress doesn't rein in spending we will eventually have a big problem, but assuming that unsustainable behavior will continue indefinitely is short-sighted. I see big changes coming.

Your friend should also understand that his concerns are probably shared by a great many people, and that is one reason I think that equities are still undervalued. The bad news has been widely disseminated, but the good news has been ignored.

CDLIC said...


Thank you for your reply. I have passed it on to my friend.