Sub 50 ISM Readings Don’t Always Mean Recession
The ISM manufacturing PMI has dipped below 50 for two straight months, which suggested that the US manufacturing has at least been slowing somewhat, if not down right contracting.
Of course, this also suggested that the US economy has slowed somewhat in the recently months, but not quite near a recession yet. The July jobs report, for instance, was quite strong (at least on the surface).
In fact, sub-50 ISM readings don’t always come with recession. The chart below from Barclays show the ISM could dip below 50 without followed by a recession (shaded areas).
Source: Barclays Capital
But during these periods of sub-50 readings which were not followed immediately by recession, the Federal Reserve happened to be easing monetary policy in those periods. Another possibility is that the Fed eased in the past when they saw persistent sub-50 ISM readings:
“Indeed, history suggests that the Fed tends to act when the ISM remains below 50 for several months, even when the broader economy is not in recession (Figure 1 and 2). In all three periods in the past 20 years in which this occurred, the Fed has cut interest rates (Figure 2).”
Source: Barclays Capital
12 Comments
Well, yes, but the notion that a single economic indicator can predict recession is wrong.
What we’ve had is stagnation. Wage growth has actually been negative in the ‘recovery’.
GDP growth is at stall speed and in the cases where GDP growth has been over 3 % it’s usually been due to expiring tax breaks which makes companies buy inventory stocks in a frenzy and similar one-off events.
The U.S. now has a debt to GDP of over 105 %.
It will hit more than 110 % within only 2 years. Italy is at 120 %. Spain is now approaching 100 % fast.
And all I’ve said about U.S. debt assumes no new recession. If we get a recession within the next 3 years, highly likely in other words, then U.S. debt to GDP will get to Italian levels quite quickly.
This is the Japanisation of America.
The difference is that they had an unemployment of around 4 %. America has an unemployment of around 10.5 %(I’m talking about U-3 only) once you count in the non-boomer dropouts.
Recession is in some ways obsolete. The Great Depression had two recessions and two recoveries. But the overall trajectory was that of stangation and a slowly but surely deterioating standard of life.
We have the same thing now, although not as a serious as the event in the 30s. Although I am by no means a dyed-in-the-wool Keynesian, Krugman is right to call this the ‘Lesser Depression’.
U.S. debt/GDP is a meaningless stat, David. Look at Japan. This is one of the fundamental insights of MMT…
Considering this isn’t an MMT website….I’d disagree with you that debt/GDP is a “meaningless stat”. It could be quite indicative of wasteful spending, malinvestment and inefficiency at the govt level.
So what significance do you find in the U.S. debt/GDP at the present time?
Like the persistent current account, I think there’s a certain truth to the fact that they represent a society that is changing and becoming increasingly more dependent on consumption and govt spending….I’m not saying it’s a structural problem, but I don’t just shrug it off as an entirely immaterial development. But I know there’s a lot that MMT disagrees with in that view re: consumption, the CAD, etc.
Cullen — Don’t you feel that you owe a lot to the MMT folks? Honestly, the only reason I come here is because you understand the MMT fundamentals.
Anyway, thanks for running this fine blog, and tolerating the occasional divergence of opinion…
I owe a lot of people a lot. Honestly, I don’t even personally know a single one of the MMTers. Warren has spent an inordinate amount of time teaching me the basics of MMT via email and I appreciate the efforts, but a lot of it’s turned out to be incorrect in my opinion. It’s not like they were personal mentors or something. In fact, during the JG debates I think it became obvious that I trusted many of them and felt I was closer to many of them than I really was. They turned on me as fast as they turn on everyone else who criticizes them. That’s fine. It was my mistake to be so naive in believing I was part of the clique (or even feeling the need to be part of the clique).
I owe a lot of other people a lot more for showing me the actual operational points where MMT goes wrong. In fact, I’d say Brett Fiebiger put in 10X the effort to help us out than any MMTer ever did. He took my primer, chopped it up and basically rewrote the entire 30 page thing…Ramanan, JKH, Brett and many others have made huge efforts to show how MMT is incorrect about things and have expanded views on so many other subjects. MR has turned out to have far less in common with MMT than I originally thought it would. So yes, I am greatly appreciative of a few MMTers and their efforts and I cite them in my paper for it. But others deserve zero thanks and were nothing but critical (even insulting) during and after my brief involvement with them. I’m not sure why you would expect me to praise the MMTers as many of you seem to do?
MMT liked you as long as you were willing to spread their message across Pragcap, Seeking alpha and business insider. I think you underestimated how important the job guarantee was to them and when you pushed back on it you became the enemy. Water under the bridge by now. MR is better having zero association with MMT. they’re an unruly and ideological bunch.
I saw your fallout with MMT coming a mile away. MMT has always been hostile to the finance world and capitalism. You’re in the finance world and a capitalist who just happens to understand that government isn’t always bad. But your views are not nearly as extreme as MMT’s statist views. The break-up was inevitable. The product is far superior when you strip out the statist agenda anyhow.
I’m thankful for having gone through the process of having learned MMT. And I think everyone should learn it just like they should learn all schools and decide what they believe is right. But this website has moved on from the MMT era and turned a new page.
The manufacturing ISM also spent 8 of 12 months in 1985 below the 50 level without going into recession.
This post is saying that just because we are below 50 doesn’t mean we are in a recession, but it is also implying that the Fed will need to ease to keep us out of a recession… except it doesn’t address the fact that each time the Fed eased in the past (in the examples used) it used a rate cut. That’s not an option today, so I assume the Fed will have to ease with QE… what are the implications of that? Will it work in a BSR? How does monetary policy stimulate demand when we have near record high inventories across multiple industries? Or does it just make the stock market look good while the ISM will continue to contract and the US continues to lose the consumer base? Actually, how does monetary policy stimulate consumer demand at all in today’s environment? I know the only what I’m going to take out a loan is if I can get a negative interest rate.