Looking For Bottom – ISM Numbers for January

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Macroeconomics

It’s tempting to get excited about any crumb of good news. But just because the Institute for Supply Management’s manufacturing index “inched higher to 35.6% in January from 32.9% in December,” is not enough data to call “Bottom’s Up,” despite what folks from the ISM factory survey committee have to say. According to Norbert Ore, chair of the ISM factory survey committee, “the report may indicate that the bottom of what’s been a severe factory downturn might be near at hand.”

A word of caution, I do say. Let’s take our rule of three again. The first time we hear something, it’s a data point. The second time we hear it, it’s a line. And the third time, it’s a trend. We’ll need to see three months of improved numbers to say that we have hit bottom. In addition to that signal, there are others that also probably make a lot of sense to examine. These signals include sales of existing homes and new home starts (and folks, please remember that you can’t trust everything you hear from the National Association of Realtors, as they are quite brilliant at spin). For example, whereas it sounds great that sales of existing homes increased by 6.5 in December from a month earlier, 45% of those sales were for foreclosed homes, all sold at a discount. Again, we’ll need a few more data points to support the case that the housing market has hit bottom as well. Other signals worthy of watching include automotive sales ,which unfortunately are still declining.

But just as one month’s reading doesn’t make for a trend, the improvement could be explained away due to re-stocking which may have led the increase in both new orders (to 33.2% from 23.1% in December) and production (to 32.1% from 26.3% in December). Any number less than 50% indicates a contraction. According to MarketWatch, this ISM reading is “consistent with GDP contraction of about 1.7%,” on an annualized basis.

Yesterday, we examined which industries were likely to lead the recovery and specifically referenced consumer staples and health care. According to the ISM index, of 18 industries tracked, only two were officially expanding, textile mills and petroleum and coal products, according to the offical survey press release. But ISM does not measure the health care industry per se.

Not to rain on the ISM parade, we promise to monitor the crumbs!

–Lisa Reisman

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