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July 2013 ISM

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Today’s release of manufacturing conditions from July showed momentum in the “real” economy that stock prices seem to have been sniffing out in recent weeks. As always, the best leading indicator within the ISM report is the new order data (highlighted in yellow and blue in the following table). Orders remain firm despite sluggish overall economic growth both domestically and abroad.

Some may fret over the reported decline in order backlogs, but with solid new order flow and lean inventories (grey row in the table), the prospects for a modest acceleration in overall economic growth in the back half of the year remain favorable—as the following comments from the ISM suggest:

The past relationship between the PMI™ and the overall economy indicates that the average PMI™ for January through July (52.1 percent) corresponds to a 3.1 percent increase in real gross domestic product (GDP) on an annualized basis. In addition, if the PMI™ for July (55.4 percent) is annualized, it corresponds to a 4.1 percent increase in real GDP annually.

The economy remains in the midst of the great escape from the heightened state of fear, uncertainty and doubt that has prevailed since the 2008 financial panic. It’s reasonable to expect the next ISM report to dip some from July’s level as today’s red hot production reading (third line in table below) cools down a tad and is brought in line with new orders. But the escape should continue even as economic indicators bounce around on a monthly basis. As it does, conditions should be largely supportive of the stock market and re-trigger Fed “tapering” chatter—which will weigh on bond prices.

Fed tapering worries may cause financial market volatility, but rising bond yields because of a better economy is a good development.

Aug. 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 52.

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.