ISM Signals Expanding Economy

Most economic observers have noted that any encouraging data has so far taken the form of a reduction in the pace of declines.  This is a necessary, but not a sufficient condition for improvement.

Anyone looking for leading indicators of economic growth wants to see more than a green shoot or two, but that is how beginnings occur.

Today we have the first real-time data indicator consistent with actual economic growth — the ISM manufacturing report for May.  This came in at 42.8%, slightly better than expectations.

Interpreting the data requires some care.  A reading below 50 indicates contraction in manufacturing.  Since manufacturing has played a declining role in the US economy for many years, the question is what level of decline is still consistent with overall economic growth.

The ISM analyzes this question and reports as follows:

A PMI in excess of 41.2 percent, over a period of time, generally
indicates an expansion of the overall economy. Therefore, the PMI
indicates growth in the overall economy following seven months of
decline, and continuing contraction in the manufacturing sector.

The rate of economic growth corresponding to the May reading is only 0.5%.  It is small.  It is only one month.  But it is, perhaps, a start.

It is also occurring before much of the stimulus package has had an effect.

The ISM also notes that the New Orders Index, considered to be a forward indicator, has bounced rapidly from the December '08 low of 23.1 to show actual (small) expansion with May's reading of 51.1.

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