GDP data came in hot Wednesday, but ISM / Chicago PMI both came in very weak, near recessionary levels. As the nearby chart shows, ISM leads GDP — up and down.
The steady downtrend since December 2003 and this month’s dip below 50 in the ISM index point to a weaker U.S. economy in the months ahead.
ISM Manufacturing Index vs. U.S. Gross Domestic Product
(Quarterly, ISM Data through Feb-07)
Chart courtesy of Michael Panzner
ISM at or below 50 means a contracting manufacturing sector. BUT It may not mean a contracting economy as a whole. Even the chart shows that ISM=50 is associated with economic growth better than 2%. I think a lot of people miss that historic fact.
js,
Yes, ISM would have to drop a bit more and stay there a while before worrying about a recession. It dropped below 50 in November, but then it was back over 50 in December. It’s definitely something to keep an eye on, though.
The rule of thumb is that it take a 44 on ISM to indicate recession for the economy as a whole. If anything, that number probably falls over time given the declining importance of manufacturing to the economy.
Next week’s non-manufacturing (eg, 80% of the economy) ISM should remain comfortably above 50.
Nevertheless, I would concur that there may well be an inventory-driven deceleration in Q1, which should be followed by a resurgence in activity in Q2.
JS, Northern Trust economist Paul Kasriel showed that it is actually the good producting industry that causes the swing in the GDP, not the service economy.
And contrary, the ISM is actually a larger pie than most thought. See the 12/12/2006 article here:
http://www.northerntrust.com/pws/jsp/display2.jsp?XML=pages/nt/0601/1138283681241_6.xml&TYPE=interior
The big drop came from inventories. They fell from 48.5 to 39.9. HUGE drop. Services will not have an inventories perspective. Drop in inventories along with the drop in backlogs, means we are topping out in the business cycle.
Off topic I know, but some local retailers here in Chicago are really struggling to move winter clothing. I was in Kohl’s and Carson’s last night and both have 60% off the already marked down price deals going on. I picked up a couple of Kohl’s sweaters a month ago and the price on each has been cut an additional $6. Time to take the receipt back in and get the difference (yes, they’ll do it forever, the clerk said.) Still holding out on the Christmas gift wrapping paper- that’s only 80% off now. When it gets to 90% I’m buyin’.
Yeah, employment is finally ticking up, and wages are starting to follow.
must be time for a recession.
Great chart and blog; keep up the good work!
“ISM at or below 50 means a contracting manufacturing sector. BUT It may not mean a contracting economy as a whole. Even the chart shows that ISM=50 is associated with economic growth better than 2%. I think a lot of people miss that historic fact.”
there seems to be a slight lag btwn ISM and GDP evident throughout the chart.
But is there a disconnect between the way the economy is heading and the direction of the markets? And if so, how long can that disconnect last? Why doesn’t the market move along with the direction of the economy? Either the data is not accurate, not current, lags, or massaged or the markets are just irrational? Which is it and could it be both?