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September 2013 ISM

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Although manufacturing represents approximately 10-15% of the U.S. economy as commonly measured, it is highly correlated with the overall economy. With this in mind, September’s Institute for Supply Management’s (ISM) reading suggests manufacturing did not cool off with the weather. The industrial renaissance continues to unfold and the fundamentals underlying the private sector economy remains resilient.

We believe the stock market is once again adopting its role as a leading indicator of future economic prospects and reflecting the resilient private sector fundamentals. What are the favorable “fundamentals”? Game changing technology being applied to the manufacturing process (direct digital manufacturing, 3-D printing, software simulation, computational manufacturing), the energy revolution, the recoveries in “high-multiplier” industries like housing and autos as well as the slowdown in China. The latter brings relief on the commodity front which means lower inflation for the developing world (a very good thing in our judgment).

All this may sound odd given the headlines warning us of economic trouble associated with the government shutdown and budget drama in D.C. However hard it is to believe for those that view the earth revolving around Washington D.C., the private sector continues to do its thing and grow—despite Washington’s wet blanket policies.

The emerging fundamentals remains good news for stock investing and bad news for bonds as continued economic resilience will cause Fed “tapering” talk to resurface soon.

Here’s what the ISM says about today’s release:

A PMI™ in excess of 42.2 percent, over a period of time, generally indicates an expansion of the overall economy. Therefore, the September PMI™ indicates growth for the 52nd consecutive month in the overall economy, and indicates expansion in the manufacturing sector for the fourth consecutive month. Holcomb stated, “The past relationship between the PMI™ and the overall economy indicates that the average PMI™ for January through September (52.9 percent) corresponds to a 3.3 percent increase in real gross domestic product (GDP) on an annualized basis. In addition, if the PMI™ for September (56.2 percent) is annualized, it corresponds to a 4.4 percent increase in real GDP annually.”

Oct. 1 (Bloomberg) — Following is a summary of U.S. manufacturing conditions from the Institute for Supply Management (ISM). The Bloomberg median estimate from 84 economists was 55.

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 42.2 percent. A PMI over 42.2 percent indicates an expanding overall economy.

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