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.
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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