ISM SOARS PAST EXPECTATIONS EASING RECESSION FEARS
Today’s ISM report came in at a healthy clip of 56.3 – much better than the consensus estimate of 53. Markets are breathing a sigh of relief after Chinese PMI also came showed strong growth. A look under the hood shows reason to remain a bit skeptical, however, as new orders declined. According to Econoday the report is strong primarily due to lagging factors. Nonetheless, given the extreme pessimism and double dip fears this report overall is a welcome bit of news for the bulls as it shows an economy slowing, but not falling off a cliff:
“Lagging factors gave what is a bit of a deceptive boost to the ISM’s manufacturing index masking a further slowing in the key leading index of new orders. The PMI came in at a stronger-than-expected 56.3 for a sizable eight tenths gain from July. The reading is well over 50 to signal month-to-month growth and in the comparison with July, to signal growth at an accelerating rate. But this growth is in general business activity: production, employment, inventories. These three factors all accelerated in August with a special note on inventories where the gain may reflect in part an unwanted build.
New orders slowed but just a bit, down four tenths to 53.1 for its lowest reading since the manufacturing recovery began in the second quarter of last year. Unfilled orders also slowed, down three points to 51.5 and its weakest reading since December. The slowing in order build is certain to limit future improvement in business activity.
Still today’s report is solid and includes strength in both exports and imports and an increase in prices paid that reflects demand for inputs. Though the slowing in orders is a concern, stocks are rising on this report.”
Updated:
I did a little research into the decline in new orders. The correlation between new orders and the overall index is very tight. It is safe to say that the two are likely to converge in the coming reports. If the regional surveys are any indication it likely means the overall index will decline as opposed to a dramatic surge in new orders. Nonetheless, this is a clear sign that US economy is slowing, but not collapsing as many might have feared.
That’s one heck of a sigh of relief. I wonder if we’re spending it all in the first hour of trading. Not exactly stunning volume for the first hour of trading is it? I hate a whipsaw market. Who can possibly feel confident when we meander around for a few weeks and then explode either to the upside or downside?
I’ve read that the ISM lags the ECRI by 2-3 months… Why so much fuss over a lagging indicator?
I remained puzzled by this number. We have had nothing but terrible regional Fed surveys which have been shown to be correlated to the ISM for the past few weeks. Yesterday, the regional ISM surveys out of Chicago and New York also pointed to a severe slowdown in growth. Yet, the national number came in with surprise growth? This number is a major outlier in the data, all of which are confirming to the downside and come from multiple sources. Seems odd.
Also, the employment measure jumped to 60.4 yet we had ADP employment (below consensus of course) show a loss of manufacturing jobs in August. 60 is a massively positive print for employment. It should have been confirmed elsewhere but is not. Throw in a terrible construction number with huge downward revisions and brutal auto sales and it is hard to see any verification for a +0.8 MoM number on the ISM even if it was fueled by lagging rather than leading economic indicators.
I think ISM #s may be exaggerated by automakers and supplier cranking up production for 2011 model year.
Good point on lackluster volume. Many investors are leaving the stock market and entering the bond market (after heck of bond rally). Volume even this morning is anemic. It seems to me that the rally is driven by sophisticated algorithms chasing few fraction of a point in fast paced automated volume trading. So the algos are driving it higher in mass. Watch out when the same algos sell in unison.
I’m puzzled as well, so 1 + 1 + 1 = 4? Math doesn’t apply to government data? What’s behind that?
Leading indicators are still bad, but this is enough to get the shorts scrambling for a bit. At 56.3 we are almost certainly closer to the peak than not.
Some say the Stockmarket has signaled a “Hindenburg Omen”
Maybe its “The US Economy” that has signaled a “Hindenburg Omen”
This data is not as strong as some might have you think. But it is enough to spark a heck of a short covering rally. Goldman’s take on the ISM:
The ISM Number of 56.3 came higher than the top of the range of what every single economist had been predicting, which topped at 56.0. But at least the administration works in mysterious, if not so subtle ways. Here is Goldman’s explanation for what caused the unexpected surge.
ISM Up on Output/Employment; Construction Falls from Downward-Revised Base
BOTTOM LINE: While we and almost all other forecasters had looked for a sizable decline, the ISM manufacturing survey rose slightly in August. The headline increase was chiefly driven by a strong read in the production index while new orders fell slightly, almost closing a gap between the orders and inventories indexes that was more than 20pts just three months ago. Construction outlays fell, from a base that was revised down sharply, with weakness tilted toward residential spending.
US-MAP
ISM mfg index +10 (5, +2), with -1 judgmental adjustment for composition.
Construction outlays -3 (1, -3), with -2 judgmental adjustment for large downward revisions.
KEY NUMBERS:
ISM mfg index up 0.8 pts to 56.3 in Aug vs. GS 52, median forecast 52.7.
Construction outlays -1.0% in July (mom, -7.9% yoy) vs. GS -1.6%, median forecast -0.5%.
MAIN POINTS:
1. The Institute for Supply Management (ISM) surprised on the upside, rising 0.8 point to 56.3 in August. This increase was mainly driven by stronger production and employment indexes (which rose by 2.9 points to 59.9 and 1.8 points to 60.4, respectively). New orders and supplier deliveries, however, both declined (from 53.5 to 53.1 and from 58.3 to 56.6, respectively). As the inventories index rose 1.2 points to 51.4, the difference between orders and inventories fell by 1.6 points to 1.7. Barely three months ago, this gap stood at 20.1. It is largely on this basis that we have applied a -1pt judgmental adjustment to the US-MAP reading, which still leaves +10 in the aggregate index. Regarding the components that do not enter the headline, prices paid rose by 4 points to 61.5 and customer inventories rise by 4.5 points to 43.5.
2. Construction outlays fell in July – more than anticipated by the median forecast but less than we had expected. However, data for May and June were both revised down significantly. The level of outlays in June appears to be about 2¾% below its previous level, prompting the -2pt judgmental adjustment noted above. The weakness, both in the preliminary gain reported for July and in the revisions, was concentrated in the residential component. Overall, the report confirms weak paths into Q3 in both residential and private nonresidential spending on structures.
Surprising data indeed.
One way to look at it is more production combined with less orders will lead to larger stocks, meaning that production might be peaking now and for the foreseeable future. We shall see.
“SOARS” ???? i love your blog and the actual details in this post are spot on. but please, that headline is more apropos of CNBC.
Ah, the numbers are up today and just in time to keep the Dow from slipping below 10k and lift the indexes before the coming jobs report. How conveniant!
@KZ: I agree the 10k Dow seems to be a must for someone. Without sounding strange I would say the key has been the USD all along the way. A major player in the financial world has control of the throttle. If you follow overnight trading and futures it is clear the selling begins early am US and some times before news is released to build the EURO up and the crash the DOLLAR down. However, Friday jobs number will not be very bad. Why because all the news and spin doctors are over exagerrating it now through Friday to come out ahead. Also, watch the dollar and see what is propping up this market. Once the bullets are exahausted with the Fed and others players (ECB, White House) this market can finally complete it’s natural cycle and then we can gain from the prosperity it will bear.
Throw some charts up with the following:
1. ISM Employment Index & Payrolls – wa-a-a-y out of whack. The Index has not been higher than the current level since 1973
2. ISM New Orders vs Production – dropping like a stone
3. Difference between No.2 vs the Employment Index – ALL TIME LOW
You could make the case that the Employment Index is the one that is right and will lead Orders and Production higher to catch up……but I wouldn’t.