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ISM Index Tells Same Story, Just Different Faces.

  • Written by Syndicated Publisher 48 Comments48 Comments Comments
    October 6, 2011

    ism-composite-100411Been there. Done That.  That is how the saying goes anyway.   Today we saw the release of the ISM Non-Manufacturing Index which came in lower than the read last month.   Of course, as usual the media was replete with reports about the strength of new orders and backlogs but bounces in negative trends are hardly something to get excited about.   If things were improving internally there would not have been such a steep drop in employment which, by the way, doesn’t bode well for Friday’s jobs report.

    Our composite ISM index (a weighted average of both the Manufacturing and Non-Manufacturing Reports) tells us the real story.   Since obtaining its stimulus fueled peak in February of 2011 the weakness in the economy has been pervasive.   As stated before, nothing descends in a straight line, and as businesses get drawn down to certain points there will be fits and starts of activity.  With all due respect to the media – this doesn’t mean that economy has bottomed and that a recovery has begun.  It is a tentative bounce in downtrend.

    Let’s take a look at the last time we were here and you will see what I mean:

    • The composite index is now at levels that we saw in September of 2007.
    • The level then was after a much longer decline from the previous peak of 65 in January of 2004.
    • The index is currently declining from a peak of 65 in February of this year.
    • The current decline is much sharper than previous showing extreme weakness.
    • The index bounced from September to October of 2007 to a reading of 53.1 prompting media exclamations of economic recovery.
    • The recession started in December of 2007 just two months later when the index rang in at 51.7.
    • Breaking the components down into their individual parts the Manufacturing Index is at 51.6 and the Non-Manufacturing Index is at 53.   Both indices are where they were in November of 2007.

    In 2007, the Fed, mainstream economists, media and analysts were all talking about a soft landing scenario.   Bernanke was cutting interest rates and Bush was flinging out tax cuts in order to keep the economy from stalling.    It worked momentarily but ultimately failed.

    Currently, we have Ben on “The Hill” talking about more support for the markets and the economy.   Obama talking about tax cuts for businesses.  Europe dolling out potential billions in an all-out effort to bailout the Eurozone.  Faces may be different but the game remains the same.

    Which is why all of this seems to strangely familiar for me.   The point to be made here is that “a” number doesn’t tell us anything about the state of the economy especially when there are seasonal factors involved.    However, the trend is much more telling and that is clearly negative.   The recession is coming whether we like it or not.  While it most likely will not be as bad as it was in 2008 it will still drag earnings and stocks lower putting pressure on consumers and the economy.   Businesses in turn will retrench driving unemployment higher and the negative cycle ensues.

    Images: Flickr (licence attribution)

    About The Author

    Lance Roberts – Host of Streettalk Live

    lance robertsAfter having been in the investing world for more than 25 years from private banking and investment management to private and venture capital; Lance has pretty much “been there and done that” at one point or another. His common sense approach has appealed to audiences for over a decade and continues to grow each and every week.

    Lance is also the Chief Editor of the X-Report, a weekly subscriber based-newsletter that is distributed nationwide. The newsletter covers economic, political and market topics as they relate to the management portfolios. A daily financial blog, audio and video’s also keep members informed of the day’s events and how it impacts your money.

    Lance’s investment strategies and knowledge have been featured on Fox 26, CNBC, Fox Business News and Fox News. He has been quoted by a litany of publications from the Wall Street Journal, Reuters, The Washington Post all the way to TheStreet.com as well as on several of the nation’s biggest financial blogs such as the Pragmatic Capitalist, Zero Hedge and Seeking Alpha.