CLAIMS & CHICAGO FED POINT TO BULLISH START IN 2011

The positive trends in regional ISM reports and initial jobless claims continued this week as both reports came in substantially better than expected.  Initial jobless claims fell by 34,000 to 388,000.  Analysts had been expecting 415,000.  Some seasonal adjustments have caused volatility in the data of late, but on the whole the trend is very clear – the labor market is improving and could begin to show some real signs of life in 2011.

The Chicago PMI report was even stronger with manufacturing firms in the Chicago region reporting a booming economy (via Econoday):

Purchasers in the Chicago area are reporting red hot conditions in December. Their business barometer index jumped more than six points to 68.6. Details show major acceleration in new orders, to a 73.6 level which isn’t likely to be exceeded in future reports, at least exceeded by much. In other words, incoming business is as good as it gets in the Chicago area.

Production, at 74.0, is keeping up with new orders while employment, at 60.2 for a nearly four point gain, is expanding sharply. Inventories are building, deliveries are slowing and input prices are rising — all indications of strength.

A pivotal sign of strength is a big build for backlog orders which also increased in the Philadelphia and Richmond Fed reports. Rising backlogs point to the need to increase output, increase capacity and hopefully increase employment. The Chicago sample includes purchasers from both the manufacturing and non-manufacturing sectors, and today’s report points to robust strength in next week’s national purchaser reports from the ISM.

Highlights from the ISM report:

• PRODUCTION reached its highest levels since October 2004;

• NEW ORDERS improved to 2005 levels;

• EMPLOYMENT reached its highest level in more than 5 years;

• PRICES PAID accelerated to its highest point since July 2008.

Chicago manufacturers also provided a glimpse into 2011 with equally bullish commentary:

1. 2010 was a very, very good year, 2011 looks just as strong thru Q1!

2. The level of business keeps increasing and the resources to handle are not available.

3. Our backlog is increasing. Supplier lead times are still too long.

4. Employee turnover is starting to increase, this along with continued downsizing and increased outsourcing is driving consultant hiring.

5. Lending market slowly thawing but only for strong (financially) borrowers. Weak borrowers are still finding it nearly impossible to find a competitive source of reliable funding.

6. Some localized shortages of stainless and HRS plate continue to cause some production problems. business continues to improve for us though not as strong as it has been.

7. Food Commodity markets are strongest in years. Global supply/demand now has greater impact than domestic S&D’s.

JM Keynes once said “when the facts change, I change my mind”.  Anyone still denying that the data has vastly improved in recent months is simply ignoring the facts.  Despite the many headwinds, the US economy is healthier than many would like to admit.