Recession Over: ISM Index Shows Economic Expansion

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machinehead's picture
machinehead
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Recession Over: ISM Index Shows Economic Expansion

From the Institute of Supply Management (formerly the National Association of Purchasing Managers):

Manufacturing's 18 consecutive months of decline ended in August as the PMI registered 52.9 percent, which is 4 percentage points higher than the 48.9 percent reported in July. This is the highest reading since June 2007, when the index also registered 52.9 percent. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.

A PMI in excess of 41.2 percent, over a period of time, generally indicates an expansion of the overall economy. Therefore, the PMI indicates growth for the fourth consecutive month in the overall economy, as well as expansion in the manufacturing sector for the first time since January 2008.

[Chairman Norbert] Ore stated, "The past relationship between the PMI and the overall economy indicates that the average PMI for January through August (42.2 percent) corresponds to a 0.3 percent increase in real gross domestic product (GDP). However, if the PMI for August (52.9 percent) is annualized, it corresponds to a 3.7 percent increase in real GDP annually."

http://ism.ws/ISMReport/MfgROB.cfm

Of particular interest to me is that the ISM 'prices paid' index popped from 55.0 in July to 65.0 in August, signaling quickening inflation.

The ISM is a private-sector index, not subject to political manipulation. It unambiguously shows that the recession has ended, and that GDP will grow during the 3rd quarter of 2009. (The government's 'flash GDP' report for the 3rd quarter will be issued at the end of October.)

One can debate how durable this expansion will be. But the fact that the recession which began in Dec. 2007 has ended, probably in July 2009, is not much in doubt. Stocks led the economic bottom by about 4 months, which is typical. Now the coincident ISM index shows that expansion has taken hold.

Probably the greatest risk to the expansion is that the ISM 'prices paid' index is so high, so early. This is quite atypical, particularly when the official PPI and CPI indexes are still indicating deflation. Someone is wrong here, and it's probably the government.

 

 

 

 

Farmer Brown's picture
Farmer Brown
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Re: Recession Over: ISM Index Shows Economic Expansion

 

Yeah, right!

Davos's picture
Davos
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Re: Recession Over: ISM Index Shows Economic Expansion

I lke the cartoon on page on of ThunderRoad, and I like the dollar quote at the end about the guy living 3500' up.

 

Farmer Brown's picture
Farmer Brown
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Re: Recession Over: ISM Index Shows Economic Expansion

Interestingly enough, I just received my "chart of the day" and it shows a remarkable correlation between the adjusted ISM PMI index rising above 60 and a stock market downward correction.  The logic is that an ISM PMI index rising above 60 points to higher interest rates/inflation and thus stock market investors take some money off the table in advance of what they believe to be diminishing earnings.  Whether you buy the logic or not, there is little choice in accepting what the chart says.  I cannot post the chart as it is a paid service and I already got in trouble once around here for doing so.

Morpheus's picture
Morpheus
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Re: Recession Over: ISM Index Shows Economic Expansion
Farmer Brown wrote:

 

Yeah, right!

+10

I'm with you. Until someone, anyone, reconciles the screwed up macro-economics I'll remain unconvinced.

investorzzo's picture
investorzzo
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Re: Recession Over: ISM Index Shows Economic Expansion

30 to 1 insider selling. What is it that were missing? Gold up, silver up, dollar down.......

http://www.mcalvany.com/podcast/?p=93

specie's picture
specie
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Re: Recession Over: ISM Index Shows Economic Expansion

MH,

I'm tinking we topped.  No H&S breakout, but failure at res and fibre nacho.  Kept thinking '09 is gonna look just like '08 only different.

 

major difference may be higher gold, lower dollar, and a sp500 solid long term bottom 666 or lower.

 

machinehead's picture
machinehead
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Re: Recession Over: ISM Index Shows Economic Expansion
Farmer Brown wrote:

Interestingly enough, I just received my "chart of the day" and it shows a remarkable correlation between the adjusted ISM PMI index rising above 60 and a stock market downward correction.  The logic is that an ISM PMI index rising above 60 points to higher interest rates/inflation and thus stock market investors take some money off the table in advance of what they believe to be diminishing earnings.  Whether you buy the logic or not, there is little choice in accepting what the chart says.  I cannot post the chart as it is a paid service and I already got in trouble once around here for doing so.

That's a good observation. When the main ISM index goes over 60, GDP growth is pushing 5 percent, and the Fed is usually tightening. Contrary to what one might first assume, strong GDP is not bullish -- it leads to overheating and inflation.

An even better inverse correlation exists between stocks and the ISM 'prices paid' subindex. A low value of the prices paid index (say, under 30) is bullish. This occurs during periods of economic slack, when the Fed is easing.

But when the 'prices paid' index goes over 80, inflation is roaring and stocks get smashed. For instance, in June 2008, the ISM prices paid index reached 91.5, the highest level since 1979 (another runaway inflation year). Stocks got pounded to within an inch of their life in the autumn of 2008.

The current ISM prices paid index, at 65, isn't into bearish territory yet. But it doesn't leave us a great deal of headroom. Gold approaching $1,000 says that prices are likely to roar back just as quickly as the economy did. Hope this doesn't turn out like the short-lived 1980 economic recovery, which slid back into recession in 1981 as inflation and interest rates quickly overheated again.

But for now, the world economy is screaming back into growth mode. We'll soon find out where the capacity-constraint tripwires lie.

idoctor's picture
idoctor
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Re: Recession Over: ISM Index Shows Economic Expansion

Oh the Government can!

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