I thought these comments from Bill McBride at Calculated Risk were good:
“If someone looked at just manufacturing, they might think the US is near a recession. And if they just looked at housing, they’d think the economy is recovering. Which is it?
First, the decline in the ISM index was partially driven by exports (no surprise given the problems in Europe and slowdown in China). The ISM export index declined to 47.5 in June from 53.5 in May, the lowest level since early 2009. However some of this export weakness will probably be offset by lower oil and gasoline prices.
Second, the current ISM reading of 49.7 isn’t all that weak. Goldman Sachs analysts noted yesterday: “A reading such as this has historically been associated with just under 2% real GDP growth–very near our current second-quarter tracking estimate of 1.6%.”
Third, housing is usually a better leading indicator for the US economy than manufacturing. Historically housing leads the economy both into and out of recessions (not out of the recession this time because of the excess supply in 2009). Manufacturing is more coincident. So the ISM index suggests some weakness now – mostly abroad – whereas housing suggests an ongoing sluggish recovery.
Who ya gonna call? Housing.”
I agree 100%. Bill and I were both ahead of the pack in calling a housing bubble and now appear to be on the same page regarding housing’s role in the current economic environment. Bill is probably a bit more optimistic than I am (I see more of a muddle through for housing rather than a bottom), but we’re definitely both in the “housing isn’t collapsing any more” camp. And as I mentioned previously, I’d be very surprised if housing activity was improving so broadly in the midst of recession.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
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