Monday, November 2, 2009

ISM Manufacturing Points to Upside Surprise

Or at least a bottoming in the manufacturing downturn. Credit Writedowns with the bullish details:

If you have been wondering whether a statistical recovery is at hand, today’s ISM manufacturing report should be the clincher. The report was definitely bullish with the ISM index rising to 55.7 and sub-components supporting the understanding that the manufacturing sector is expanding. This is quite a contrast to last month’s weak data and demonstrates that last month was a one-month aberration in what should now be seen as a full-blown technical recovery.

One can easily see the huge jump in production, but importantly there was still a decline in inventories. The importance? Back to Credit Writedowns:
But, from my perspective, it is inventories which are the most bullish data points. The inventories data show that inventories in the manufacturing sector were still being purged in October even while production is increasing. That means that inventories are likely to make a huge contribution to GDP going forward in Q1 and Q2 of 2010. GDP could again surprise to the upside.
But that's not all... look at employment. In positive 'expansionary' territory. Lets go to Calculated Risk to see how that equates to this Friday's employment report:
According to the BLS, manufacturing employment has declined by about 50 thousand per month for the last 3 months. The ISM survey suggests that manufacturing employment might have increased in October. The equation suggests an increase of about 4,000 manufacturing jobs in October (with significant variation) - not much, but that is far better than losing 50,000 jobs per month.
While any bottoming in manufacturing is nice to see, the sector is a small (and shrinking) component of our overall economy, thus it will be interesting to see how Wednesday's ISM Services data plays out.

Source: ISM / GPOAccess


Reader Charles adds to the confusion, explaining why the strong ISM report which initially resulted in equity markets rallying, may have sold off from highs:
Probably bad news then for the bulls of financial assets - stronger economy means weaker QE and money printing in the near future - no wonder stock market rally lasted on 2 hours. Market is playing out the reverse of the last 7 months' rally, when the worse news are accompanied by more rally in anticipation of more stimulus and QE. Upside down world as always.
Don't fret Charles, looks we may have another stimulus to take care of any down market. Lets just hope the "target" of this stimulus is related to long-term growth of the actual economy...