Going into today's ISM report on the manufacturing sector, the market was fully expecting more weakness. After all, isn't Europe imploding, isn't China's economy slowing down rapidly, and isn't the U.S. economy on the cusp of another recession? I've been amazed at the pervasiveness of pessimism of late. How could we be in a recession, if weekly unemployment claims continue to decline? To get a recession you really need to see a loss of jobs, and for that to happen you almost have to have an increase in unemployment claims.
So it is with some satisfaction that I note that the September ISM manufacturing report released today not only beat expectations, but contained no signs of any imminent recession. Life goes on in the U.S. economy, even as Europe struggles and China slows down a bit. As the top chart shows, the ISM manufacturing index is consistent with real growth in the third quarter of 2-3%, which shouldn't be too difficult to achieve, and would mark a welcome acceleration from the 1.3% growth of the second quarter. The U.S. economy is not slowing and about to enter a recession, it is probably in the midst of a modest acceleration from the very weak levels of the second quarter.
September export orders picked up, which suggests at the very least that the rest of the world is not in free-fall, and is probably continuing to grow as well.
The employment index also picked up, though it remains a lot weaker than the robust numbers we were seeing early this year. That's not surprising, since jobs growth has since slowed down in recent months. Most likely, this number is suggesting we aren't going to see a further slowdown in jobs growth.
To be honest, I have been expecting the economy to be somewhat stronger than it has been. But I haven't been expecting any significant improvement, only growth in the 3-4% range, which would still leave the economy substantially below its long-term trend or potential. Growth has been disappointingly slow so far this year, but this report lends support to my belief that we are in the midst of a modest acceleration. More importantly, perhaps, this report once again disproves the widely-held perception that the economy is entering another recession. Things could be a lot better, but they aren't nearly as bad as many seem to fear.
I am puzzled that Scott Grannis salutes manufacturing growth, yet mentions not the trade-enhancing exchange rate of the US dollar.
ReplyDeleteFor the first time in memory, many are writing about a USA manufacturing renaissance (Dr. Perry).
As the world's reserve currency, the dollar has been overvalued for generations. Perhaps it can come back down to reasonable levels, and that will be healthier for the global economy, especially including China and the USA.
Benjamin is right. You'd have to be blind these days to not notice that when the dollar rises, it's a sign of bad news. If the dollar soars, the ISM will tumble. Look at Australia's latest manufacturing ISM, and look at what their dollar has done this year.
ReplyDeleteThe dollar must fall!
BTW, while the ISM report was generally good, the decreasing negativity of the backlogs sub-index is of concern. If new orders don't start picking up, companies will exhaust their backlogs and eventually run out of work.
BTW, here is a great read explaining *why* mine and Benjamin's views are correct. And it has nothing to do with the Fed's interest rate policies.
ReplyDeleteDollar debasing and other short stories
Scott,
ReplyDeleteWondering how you view the negative number in the backlog of orders and the flat new orders categories.
Scott M