Recession Watch: Heads Up on ISM
At "A Dash" we have been doing research for the big number next week — the Unemployment Situation Report and especially payroll jobs growth.
As part of this work we have been looking at the ISM surveys. Market participants are used to looking at this with the interpretation of anything above 50 indicating some growth in manufacturing. The market expecation is for a reading of about 53.5. A light number will, no doubt, be viewed negatively by the market in terms of economic growth.
Given the expectaions for slowing economic growth — even bullish investors should want and anticipate this series to decline to a level consistent with the Glide Path — what numbers should we expect from the ISM?
We should take a close look at how the ISM has analyzed its own data. Manufacturing is only part of the economy — an important part, but less important in modern times with more emphasis on services. The ISM analysis indicates that a result of 50 still implies GDP growth of about 2.5% (based upon my analysis of their prior releases — one can easily infer the regression equation). Their breakeven number on GDP growth is a reading of 42. Read the relevant parts of their press release from last month.
I am not predicting a really low number on Monday, particularly after today’s data, since economic growth remains quite strong. I do believe that lower numbers in this series are inevitable and should be expected. Traders should NOT interpret results at 50 or a bit below as showing a massive increase in recession chances. There will, of course, be a knee-jerk negative reaction which we must be ready to trade, but it will not actually reflect an unusually low GDP growth rate.
Meanwhile, the Chicago PMI showed great strength. For bond traders, the Philly Fed reading faded into history.
On Street Insight, the professional service of TheStreet.com, Doug Kass opined once again that economic growth would be "lumpy." Doug’s excellent trading diary is widely followed by traders and hedge fund managers. Many of his comments, predictions, and clues from his sources help his followers profit nicely on trades, so everyone respects his views. But on the economy, we must disagree. What he calls "lumpy" data, we call normal. In any growing economy there are a wide variety of data points — some pointing one way and others pointing another. It is unreasonable to expect all indicators to rise in lock-step in a healthy economy. There is measurement error in all reported numbers, especially surveys.
The widely-followed MarketWatch site provided a preview of this week’s economic data. Please note the suggested interpretation of the ISM data:
Economists surveyed by MarketWatch are looking for a
slight pullback in the ISM to 53.7% in September from 54.5% in August.
In the ISM, the 50% is the dividing line between growth and
contraction, so anything around 54% is pretty healthy, while anything
under 52% would ring some alarm bells.The Fed always cuts rates once the ISM drops consistently below 50%.
As we suggested would happen, their preview is inconsistent with the ISM’s own recommendations for interpreting the results. The MarketWatch approach, which nearly everyone espouses, does not distinguish between growth levels in manufacturing and growth levels in the economy. Traders and investors should be expecting this series to decline, quite possibly to or somewhat below the 50 level, since that is still consistent with the expected GDP real growth rate of 2.5%, slightly below trend.