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November 2014 ISM

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With the turn of the calendar to a new month comes the routine cycle of economic readings from the month just completed.

One our favorite data points – the Purchasing Managers’ Index (PMI) – is of particular interest to us for it is both highly correlated with the economy at large and its New Orders component is a very good leading indicator of future activity.

As the table below reflects, New Orders remained quite healthy in November suggesting the economic expansion, and the overall corporate earnings cycle, still have solid underpinnings. The text accompanying the release suggests this as well:

The past relationship between the PMI® and the overall economy indicates that the average PMI® for January through November (55.8 percent) corresponds to a 4.2 percent increase in real gross domestic product (GDP) on an annualized basis. In addition, if the PMI® for November (58.7 percent) is annualized, it corresponds to a 5.1 percent increase in real GDP annually.

Other noteworthy items within the report:
Solid export orders. This is impressive in the face of a weak global backdrop and suggests the competitive shift to U.S. based manufacturing continues to unfold.

Also, employment remains healthy, and while inventory levels are being reported as moving higher, the “about right” direction from the table below suggests they are not at troublesome (excessive) levels.

Finally, the sharp drop in input prices – which pushed the overall Index level a bit lower – represents, in our book, a very favorable development. Some worry lower oil prices will dampen domestic capital spending on shale oil and gas projects and this development will slow the expansion. We believe, however, that the beneficial impact of lower oil prices across the rest of the economy will represent a major boost to economic activity in the months ahead.

Falling commodity prices (oil in particular), low inflation, low interest rates, a recapitalized banking system and aggregate consumer balance sheet, and solid, if unspectacular, economic growth, represents a very favorable elixir for the stock valuations and the continuation of the bull market.

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.

* 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 42.2 percent, over a period of time, indicates that the overall economy, or gross domestic product (GDP), is generally expanding; below 42.2 percent, it is generally declining.

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.