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January 2014 ISM

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One of our favored economic data series—the monthly Institute for Supply Management’s (ISM) Purchasing Managers’ Index (PMI) was hit by January’s bad weather across the country. The Index was weaker than generally expected and the all-important new order index (yellow highlight in table below) registered a significant decline.

How much impact did weather have on the economy during the month? Can’t tell, but we suspect it was significant. Consider the following comments from ISM survey respondents:

  • “Poor weather impacted outbound and inbound shipments.” (Fabricated Metal Products)
  • “We have experienced many late deliveries during the past week due to the weather shutting down truck lines.” (Plastics & Rubber Products)
  • “Good finish to 2013, but slow start to 2014, mostly attributed to weather.” (Petroleum & Coal Products)
The markets are reacting to the weaker-than-expected reading by increasing the probability that economic trouble is at hand. No doubt some of the doom and gloom crowd will weave a tale of emerging market contagion and Fed tapering trouble. Don’t be surprised if talk of a domestic recession (or worse) materializes.

We are not in this camp by a long shot. Monthly data points within even a rapidly growing economy ebb and flow. Within the slow growth economic expansion we are experiencing, it is no surprise that ebb and flow data points are also part of the scene. But within a larger context, the monthly gyrations are likely more “noise” than “signal”. For some current context:

  • In the ISM’s own words: A PMI® in excess of 43.2 percent, over a period of time, generally indicates an expansion of the overall economy. Therefore, the January PMI® indicates growth for the 56th consecutive month in the overall economy, and indicates expansion in the manufacturing sector for the eighth consecutive month. Holcomb stated, “The past relationship between the PMI® and the overall economy indicates that the PMI® for January (51.3 percent) corresponds to a 2.7 percent increase in real gross domestic product (GDP) on an annualized basis.”
  • 2.7% GDP growth is about the run-rate of the expansion for the past few years.
  • The lean inventory levels reported in January’s survey (see table below) suggest little in the way of troublesome inventory excesses exist.
  • The global contagion theory at this point lacks the transmission mechanism into our financial system. Absent such a mechanism, the impact of weaker foreign economies is likely to be overcome by the impact of lower commodity prices (and inflation) for the U.S. Low inflation is a “good thing” in our opinion.
A stock market “correction” is rarely a fun event for investors. But because this business expansion has many more miles to go before the next downturn in both the economy and the earnings growth cycle, a transitory market correction and not “bear market” is likely underway.

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

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.