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May 2013 ISM

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The ISM (Institute of Supply Management) survey of manufacturing conditions in May dipped to 49.0 from April’s 50.7 level.

While the key leading indicator of future manufacturing activity (new orders) also declined to a sub-50 level (see table below), May’s report is consistent with a slow growth economy and not a recession harbinger. As the ISM notes:

The past relationship between the PMI™ and the overall economy indicates that the average PMI™ for January through May (51.7 percent) corresponds to a 3 percent increase in real gross domestic product (GDP) on an annualized basis. In addition, if the PMI™ for May (49 percent) is annualized, it corresponds to a 2.1 percent increase in real GDP annually.

[Emphasis ours.]

The ISM also provides the following chart which frames ISM survey results in context of implications for the overall economy.

The ISM survey — even with today’s dip — remains well above the economy-wide breakeven line near 40 identified by the ISM.

We believe the rise in both the U.S. stock market and rise in interest rates that has occurred this year reflect another phase in the “great escape” of general investor expectations from fear, uncertainty, and doubt (“FUD”) that has been so pervasive since the financial panic of 2008. Investors are slowly becoming less pessimistic about all things economic and as expectations adjust upwards as part of this process, investment allocations towards stocks and away from the bomb shelter of cash and bonds will continue.

The great escape has not been a straight line process, of course. Economic data — like today’s report — will ebb and flow. But we expect the process to continue and drive still more asset re-allocation away from cash and bonds into U.S. traded stocks.

June 3 (Bloomberg) — Following is a summary of U.S. manufacturing conditions from the Institute for Supply Management.

The Bloomberg median estimate from 81 economists was 51.

The revised breakeven point for the overall economy is a PMI of 42.2 percent. A PMI over 42.2 percent indicates an expanding overall economy.

A PMI below 42.2 percent indicates the overall economy is declining.