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ISM Non Manufacturing Index Questions Q3 GDP.

  • Written by Syndicated Publisher 57 Comments57 Comments Comments
    November 4, 2011

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    “Things that make you go … hmmm” as the line from Saturday Night Live goes which really fits in nicely with today’s ISM Non-Manufacturing release. The index declined to 52.9 in October from 53 in September, which is the lowest level for the index since July. However, there is something questionable going on here. Let’s take a look at the readings from the 3rd quarter of this year: July 52.7, August 53.3 and September 53.0. There’s the problem. This is the non-manufacturing index that is a reading of the consumer. The behavior of this index brings into real question that massive jump in 3rd quarter GDP at 2.5% from 1.3%, which is a 92% increase, a jump that is largely attributable on the resurgence of personal consumption expenditures that we discussed.

    However, if consumers were out spending like “drunken sailors” why didn’t it show up in the non-manufacturing index? It should have but it didn’t. Furthermore, one of the areas that should have seen large increases would be “new orders”. That didn’t happen either. New orders slowed to 52.4 from September’s 56.5, which is lower than they were in August during the supposed spending boom. Backlog orders moved to a monthly contraction at a sub-50 reading of 47.0, which means that suppliers are working through backlogs as new orders dry up. This doesn’t bode well for employment in the months ahead if this trend doesn’t reverse.

    Furthermore, our ISM Composite Index, a weighted average of both the Manufacturing and Non-Manufacturing Indexes, is at levels seen just before the last recession. Most concerning is the angle of descent in the composite index, which has fallen sharply since the beginning of this year. While the market has gained some traction in recent weeks, it is also worth noting that there is a high correlation between the ISM Composite Index and the market itself. This is not surprising since the composite index is a function of the very things that drive consumers and businesses and ultimately their profitability.

    With consumer confidence at some of the lowest levels on record, both current and future expectations, and the reality that the bulk of the spending this summer came from consumer’s trying to cover skyrocketing utility bills due to a massive nationwide heat wave, the reality is that weakness will be showing up in the final quarter of the year. Maybe this is why the Fed lowered their guidance across the board yesterday.

    Going forward the market is likely to struggle as the economy comes to grips with the reality of the consumer. Furthermore, the seriousness of a Greek default is being underestimated as the likelihood of such an event is growing. This has serious implications from the trigger of credit default swap events that will impact the markets and the banks. Furthermore, the resulting sharp decline in economic growth in Greece will trigger more default issues and have a ripple effect through the rest of the Eurozone, which is already on the brink of recession. With the Eurozone comprising 20% of our exports, a recessionary drag from Europe will consequently drag us into recession as well.

    This is why we are still recommending an overweight exposure to fixed income and cash as a protection against market volatility. Caution is advised until more clarity can be found. In the meantime, I will sit here, think and go “hmmmm….”

    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.
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