Monday, July 6, 2009

ISM indices show significant improvement

The Institute for Supply Management's service-sector releases for June showed substantial improvement, as seen in these charts. Both the general indicator as well as the prices paid index have risen to levels that are consistent with the end of a recession. This news contrasts quite a bit from the gloom that continues to pervade the equity and bond markets, where investors were spooked by the weaker-than-expected payroll numbers for June. On balance, however, I think the news of the past few months has been quite positive and generally consistent with an economy that is on the mend.

The second chart is also interesting for what it doesn't show: there is no longer any evidence of a generalized price decline or what might be the seeds of a dreaded deflation. The prices paid indices are now at 50, which means that just as many survey participants are paying higher prices as there are paying lower prices. Despite the fact that the economy is still operating at a level that is significantly below its presumed potential, prices in general are not falling as the Fed's theory of inflation would predict. That means that the Fed is not starving the economy for money, and that is a good thing.


brodero said...

The employment component of the ISM non manufacturing number implies we will see some positive
payroll numbers later this year.

alstry said...

Just wait for the effect from the pay cuts to start impacting sales going forward:

Scott Farrell, left, co-owner of Zanzibar Trading Co. in midtown, helps customer Vattey Budge search for a gift last week. State workers who shop at the gift and jewelry store near the Capitol have told Farrell that the first two furlough days eliminated discretionary dollars. The third day cuts into money for necessities.

The government job cuts and wage reductions are just starting to impact the economy.

If you can't buy necessities, you can't buy much of anything else...

The Lab-Rat said...

Scott, you have such an amazing ability to polish turds. Looking back at the blog I have never seen you post anything that says 'Hold on a sec, maybe I am wrong if this is right' etc. Every coin has two sides. It would be nice to see you acknowldge the flip side every once in a while rather than pick on the bits which fit your book!

dave said...

Did you see the article by Louis Woodhill on Real clear Markets this morning, I'd be interested on what you thought of it.Here is the link if you haven't read it: get_ready_for_14_percent_unemployment_97295.html

Bob said...

A labor force that is growing and causes the unemployment rate to go up is not the same as an unemployment rate that goes up because of a significant drop in employment. In fact if you remove the just over 1 million new job seekers from the recent numbers the unemployment rate would be 8.8% (Brian Wesbury).

I don't see 9.5% unemployment causing complete panic. My casual and unscientific observation over the holiday weekend saw 4 cruise ships (Port Canaveral) at 85/90% capacity, grocery stores packed with people, but with the caveat that there were a lot more hamburger, hot dogs, and boston pork butts sold than steaks and ribs, and the beaches were brimming with people. This is all descretionary spending, but perhaps it is a last hurrah before the coming depression.

The rest of Woodhills article I agree with.


brodero said...

Woodhill's commentary denies any
sort of correlation to the employment component of the ISM
non manufacturing index. A composite of the ISM manufacturing
and non manufacturing employment
components weighted by the economy
is now at 43%....this correlates
with a year over year change in non
farm payroll of -2.5% with a lead time of around three to four other words we are going to see positive payroll numbers towards the end of the year....

Scott Grannis said...

My take on the Woodhill article: I think he makes several good points. It does take investment to create jobs, and government policies are pretty anti-stimulative because they don't increase the incentives to invest. But the numbers he throws together to come up with 14% unemployment are suspect. He doesn't allow for a lot of other factors which can and do influence the level of employment. Also, I don't think it's the case that selling more Treasuries to fund a rising deficit must necessarily reduce the money available for private investment. Financial markets are way too complex to assert this with confidence.

Yes, Obama's policies are a big hurdle and they will retard the recovery. But they won't double the number of job losses we've already seen.

Scott Grannis said...

Lab-Rat: You must have missed my comments regarding things that weren't going as well as I had expected. Obama's policies were the biggest unforeseen and negative development. April exports didn't rise as much as I had expected. The June jobs number wasn't as good as I had expected, but I think it is reasonable to think it was one of those glitches that occur in series like this from time to time; I did explain that you can't get upset over a 100K "miss" in the jobs numbers. They simply aren't that accurate to begin with.

Nevertheless, I will try to be more clear when confronted with adverse data in the future.

Daniel said...

we have to remember that corporate profits are what drive the economy. yes unemployment is typically bad, but are we going to let 10% unemployment overshadow the tremendous growth potential that companies like Apple have? The iphone was just released in China. There will be millions upon millions of more ipones being sold around the world, so don't be surprised when the earning come in these next few weeks.. I think a lot of the growth will come from emerging markets around the world, and not so much from the US.

I think corporate profits is what we should be looking at here.

Scott Grannis said...

d: excellent point. As I have showed many times, corporate profits are still very healthy. Corporations have built up huge stockpiles of cash that can be used for new investment.