Tuesday, June 1, 2010

Manufacturing index shows continued strength and rising prices

The ISM manufacturing index for May, released today, was down just a tad from April, but remains unusually strong. As the above charts suggests, based on past relationships between this index and the growth of GDP, second quarter GDP growth is likely to be stronger than the 3% registered in the first quarter. Indeed, second quarter growth could be in the range of 4-6% if the past is any guide.

This next chart shows that almost 80% of those surveyed reported paying higher prices. This is further evidence that the market's persistent concerns about deflation are misplaced. There is no weakness overall in the manufacturing sector and there is simply no evidence of deflationary pressures.

Strength in the ISM subindices was widespread, and this third chart shows very strong gains in export orders. This index hasn't been this high since the late 1980s, a period noted for its explosive growth in U.S. exports. Not only does this bode well for our economy, it also strongly suggests that the global economy is very healthy. This latter point is reinforced by the gains in shipping indices that I have been highlighting for quite some time, and the continued strength—albeit with a modest correction of late—in virtually all commodity prices.

Finally, the employment index shows very impressive strength. In the long history of this index, it has only exceeded 60 on a handful of occasions, most of which were way back in the go-go 50s and 60s. The world is growing, boosting demand for U.S. exports, and manufacturers are ramping up production and employment as a result. This is just simply very good news.


Jeff said...

I agree that this data/charts looks strong...no doubt about it. The market always looks ahead and it's the future that it doesn't like right now. Between financial (i.e. Europe, slowing Asian (china growth) and debt everywhere) issues, political issues (Washington, Korea, Washington, Israel/Palestineans, Washington, Washington) and the prospect of higher interest rates/taxes....from an investment point of view, it's tough to be optimistic even when you want to be.

Scott Grannis said...

What you're describing is classic "climbing walls of worry." The market is ignoring current signs of health, fearing that things will deteriorate.

brodero said...

The 12 month moving average of
New Orders minus Inventories is 17.93....the highest in 33 years

Frozen in the North said...

That is interesting orders as % of inventories. Not sure its a sign of anything... yes its high, but inventories have been falling for a long time. orders to inventory was much lower 30 years ago as a matter of business practice. I'm not sure I would hang my hat on that one, although it is a positive sign

John said...


I follow a couple of overbought/oversold oscillators from time to time. One of them is showing an oversold reading very near the same level of March '09. Its not foolproof but it is suggesting a pretty good rally very soon. How far it goes or how strong it is remains to be seen but I think the market goes up here very soon.

Keep in mind markets can and do often divorce themselves from economic fundamentals for considerable periods of time. Emotions play huge rolls in short term price movements and we are getting some large doses of the negative ones lately. I have many times heard it said that 'fear is the friend of the rational investor'. Those who can see opportunity in uncertainty often reap large rewards.