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February 2013 ISM

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As new orders go, so goes the economy. Today’s ISM suggests the dynamics underlying the grind forward economy remain not only in place, but may be picking up some steam. New orders (yellow highlight in table below) are solid and January’s reading was above their 6-month average.

Whether one likes the outcomes or not, the election is over, the fiscal cliff has come and gone and while Europe and other worries (sequester, etc.) may dominate the day to day headlines, businesses are getting on with business. Late last year the CEO of regional bank BB&T cited a trucking customer that was deferring the purchase of 7 or 8 new trucks in front of the election and fiscal cliff. While things have evolved in a way that caused the trucker to not place orders for all the trucks, we wouldn’t be surprised if he bought some of them with the remainder to follow in time.

Yes the stock market has risen and it’s knocking at the doors of new all-time highs in some measures, but the underlying earnings of many companies made “new highs” long ago and today’s valuations remain consistent with an economic future fearing stagnation. This continues to set a low expectations “bar” and for reality exceeding such forecasts. Such a situation remains a favorable backdrop for stock investors.

Why will stagnation not likely be the future? The inherent dynamism of the economy remains both resilient and way under appreciated. The dynamism is due to technological applications in nearly all walks of economic life, the unrelenting thrust and thirst for productivity growth as a means of survival in a highly competitive global economy, and both cyclical dynamics (think housing and autos) and secular ones (the population of Americans aged 30 to 44 is about to begin increasing for the first time since 2000, and this group historically starts most new businesses, buys the greatest number of houses and autos). Milton Friedman once said, something to the effect; market forces must be very powerful, since free markets have so few friends and so many enemies. Growth is ahead despite Washington’s wet blanket policies.

With demonstrated economic resilience, the need for crisis monetary policy continues to wane. As the Fed moves away from their crisis policy stance, today’s unsustainably low bond yields should “normalize” higher at levels more consistent with nominal growth in the economy. Bonds are going to be hard pressed not to lose money as this process unfolds. Will higher yields crush stock prices as many pundits fear? Not if yields are rising because economic expectations are readjusting away from the current too gloomy view of the future.

This happened in the 1950’s (stock bull market, bond bear market) as then gloomy expectations prove excessive, so precedent exists. And despite nostalgic views of that period, the decade of the 1950’s was actually marked by many troubles—3 recessions, war, fears of commies infiltrating government, cold war, many pundits proclaiming the “superior” USSR was taking the technological lead, etc.)

U.S. October ISM Manufacturing Higher Than Estimate (Table)
2012-11-01 14:01:18.666 GMT
March 1 (Bloomberg) — Following is a summary of U.S. manufacturing conditions from the Institute for Supply Management. The Bloomberg median estimate from 81 economists was 52.5.


                      Feb. Jan.  Dec.  Nov.  Oct.  Sept. Aug. July   6-mo

                                    ’13   ’13     ’13    ’13    ’13    ’13    ’13    ’13    Avg.


Manufacturing index     54.2  53.1  50.2  49.9  51.7  51.6  50.7  50.5   51.8

Prices paid                  61.5  56.5  55.5  52.5  55.0  58.0  54.0  39.5   56.5

Production                   57.6  53.6  52.6  53.1  53.3  51.4  48.9  53.3   53.6

New orders                  57.8  53.3  49.7  51.1  52.8  51.7  48.9  47.5   52.7

Backlog of orders         55.0  47.5  48.5  41.0  41.5  44.0  42.5  43.0   46.3

Supplier deliveries        51.4  53.6  53.7  50.1  49.9  50.5  50.2  49.7   51.5

Inventories                   51.5  51.0  43.0  45.0  50.0  50.5  53.0  49.0   48.5

Customer inventories    46.5  48.5  47.0  42.5  49.0  49.5  49.0  49.5   47.2

Employment                52.6  54.0  51.9  50.1  52.3  53.7  52.6  53.2   52.4

New export orders        53.5  50.5  51.5  47.0  48.0  48.5  47.0  46.5   49.8

Imports                        54.0  50.0  51.5  48.0  47.5  49.5  49.0  50.5   50.1


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 revised breakeven point for the overall economy is a PMI of 42.6 percent. A PMI over 42.6 percent indicates an expanding overall economy.
A PMI below 42.6 percent indicates the overall economy is declining.