April 2015 ISM
The May 1st release by the Institute of Supply Management (ISM) on April manufacturing conditions “fits” with the following big-picture investing backdrop:
- The economic expansion continues to grind forward at its slow trend (2-3% real, 3-4% nominal)
- Accumulated excesses in the form of debt, inventory gluts or rapid inflation are largely absent
- The next recession is likely well off into the future
- Even though growth is slow, it is sufficient to drive unemployment rate lower and tighten labor market (and foster modest wage growth)
- The risk of 1930s-style sinister deflation is incredibly remote
- “Crisis” monetary policy is no longer warranted
- The Fed can and should normalize policy via a move from an “ultra-easy” to “extremely-easy”
- Bond yields remain below “fair value” based on economic conditions and will likely normalize at higher levels
- Little-to-no cushion in bond prices for even a modest rise in yields
- The expansion is sufficiently resilient to withstand higher rates/yields
- The stock market may well continue to “churn” with little forward progress while it worries about Fed’s transition away from ZIRP (zero interest rate policy) – but the bull market will resume
Today’s ISM reflected:
- The all-important life-blood behind things (new orders) remains solid (see two tables below)
- In the ISM’s own words: ”“The past relationship between the PMI® and the overall economy indicates that the average PMI® for January through April (52.4 percent) corresponds to a 2.9 percent increase in real gross domestic product (GDP) on an annualized basis. In addition, if the PMI® for April (51.5 percent) is annualized, it corresponds to a 2.6 percent increase in real GDP annually.
- Inventories remain lean-to-too lean
A PMI® reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally declining. A PMI® in excess of 43.1 percent, over a period of time, indicates that the overall economy, or gross domestic product (GDP), is generally expanding; below 43.1 percent, it is generally declining.
NOTE: All figures except backlog of orders, customer inventories, imports, exports, inventories & prices paid are seasonally adjusted. The diffusion index is calculated by adding the percent of positive responses plus one half of those responding the same.
The information contained in this report is based on sources believed to be reliable, but we do not guarantee its accuracy or completeness. The information is published for informational purposes and does not constitute an offer, solicitation, or recommendation of an investment or advisory services.