Wednesday, June 1, 2011

Putting the ISM news in context


Going into today, we knew that manufacturing activity in May was disrupted in the wake of the Japanese tsunami, terrible weather, and early auto shutdowns, but nevertheless the market is having a problem digesting the news that the May ISM manufacturing indices were weaker than expected. Still, as the chart above shows, even with a significant drop in the main ISM index, there is no reason to expect that GDP growth in the current quarter is going to be any weaker than it was in the first quarter. The current level of the ISM index is consistent with GDP growth of 3-4%.


The employment component of the ISM index also fell sharply, but it is still at historically strong levels, levels that have been seen only a handful of times in the past several decades.


A decline in activity had little impact on the inflation fundamentals, with the prices paid index still registering rather elevated levels of price pressures.


Export orders fell sharply in May, but they are historically volatile and still consistent with growth.


Meanwhile, all major commodity indices have turned up from their May lows, including my favorite (above), the CRB Spot Commodity Index.


The May Challenger tally of announced corporate layoffs remained very low, but the May ADP estimate of new private sector jobs dropped much more than expected. Conclusion: hiring plans were disrupted in May, but there is no sign that employers want to reduce employment levels.


I think the proper conclusion to all this is that while economic activity was indeed disrupted meaningfully in May, there is no reason to think that conditions or fundamentals have permanently deteriorated or are getting worse. Indeed, commodity prices are signaling that things are are already on the mend. Consequently, it is likely that U.S. markets are overreacting to the downside, and we should expect better news in the weeks to come.

7 comments:

Public Library said...

Bernanke is salivating for QEIII in addition to the current stealthy financial repression going on.

M Miller said...

ECRI calling for material slow down in global growth, and a correction in commodities. Global industrial growth rates peaking in the summer (leading indicators of growth already rolling over).

ECRI not calling for recession, just a meaninful "throttling back". I think we could see a strong commodity pullback, which will be a really good opportunity. In the meantime, bonds will do well.

M Miller said...

ECRI calling for material slow down in global growth, and a correction in commodities. Global industrial growth rates peaking in the summer (leading indicators of growth already rolling over).

ECRI not calling for recession, just a meaninful "throttling back". I think we could see a strong commodity pullback, which will be a really good opportunity. In the meantime, bonds will do well.

Frozen in the North said...

That's why I read you CBP: Your always positive demeanor, when compared to my own gloomy views, provide a nice balance, and force me to use a more positive investment stance.

I worry about America's s/t inability to deal with its real problems (health care), the false news about the debt ceiling (really a non issue since it is a self impose limit), the lies and half truth going unchallenged in the media (right or left).

But at the end of the day, I count on your positive vision to balance my own more gloomy views.

All this being said, my large fixed income portfolio has done very well in the past two years... only time will tell if inflation eats all these gains...

Dr William J McKibbin said...

QEIII appears imminent and quite necessary -- inflation is just around the corner...

Kenneth said...

We hear that the Japanese earthquake aftermath is affecting the US economy but the actual impact gets little attention. So listen to this. I went to my local Toyota dealer today June 6th and thought they had become a used car dealer because that is all I saw instead of the endless rows of new cars which I have always seen in the past. The manager told me they had less than 100 new cars verses the normal 450. Parts shortages from Japan had crippled cars made in Japan but the US also where many Toyotas are made. Production is expected to pick up in July so we could see a strong recovery in production numbers to meet deferred sales as well as to rebuild inventory. Learned that Honda and Nissan are experiencing worse problems than Toyota. Seems all this must be having a meaningful impact on recent economic reports particularly industrial production

Kenneth said...
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