Against a backdrop of renewed doubt and uncertainty (Eurozone deflation? Russian aggression? China slowdown? Asset market bubbles ready to pop?), it is reassuring that news released today from the Institute for Supply Management shows the U.S. manufacturing sector remains quite healthy.
The ISM manufacturing index slipped at little in September, but is still consistent with fairly robust conditions. As the chart above suggests, real GDP in the third quarter is likely to be in the range of at least 3%, which would actually represent an improvement from the average growth rate of 2.2% over the past five years..
The export orders index also slipped a bit, but it is running about average for the current expansion. At the very least there is no sign here of any significant deterioration in overseas demand for U.S. goods, and that implies that the rest of the world is at least not on the verge of another recession.
The prices paid index suggests some moderate inflation pressures, but nothing out of the ordinary.
The employment index slipped a bit, but remains relatively strong. This suggests that in general, businesses remain optimistic enough about the future to expand their hiring.
This chart paints a very clear picture of this year's divergence between the U.S. and Eurozone economies. It's quite unusual, which is why the market is worried.
The good news from the Eurozone is that swap spreads are relatively low, which in turn suggests that systemic risks are low and the economic and financial fundamentals in Europe remain positive. The Eurozone economy is suffering from external shocks (e.g., Russia, Ukraine) and policy missteps (e.g., fiscal austerity via higher taxes), but not from overly restrictive monetary policy. Manufacturing conditions have deteriorated this year, but that's not necessarily going to lead to a big recession. If anything, the relatively low level of Eurozone swap spreads is encouraging. It's much easier for economies to recover from problems when financial markets are liquid and healthy. If swap spreads were a lot higher, that would be a different story.