If I am being honest I picked that headline because I am sure the majority of people will read it, assume I am crazy and come here to comment and tell me so…..
Here is the headline paragraph(s) from the ISM report today:
Recently, Bruce Greenwald carried out a virtual Fireside Chat with Li Lu, the founder and chairman of Himalaya Capital. Greenwald and Lu covered multiple topics during the discussion, addressing everything from the value investor's approach to appraising businesses and what he had learned from his great friend Charlie Munger. The duo also discussed China's economy Read More
Economic activity in the manufacturing sector contracted in June for the first time since July 2009; however, the overall economy grew for the 37th consecutive month, say the nation’s supply executives in the latest Manufacturing ISM Report On Business®.
The report was issued today by Bradley J. Holcomb, CPSM, CPSD, chair of the Institute for Supply Management™ Manufacturing Business Survey Committee. “The PMI registered 49.7 percent, a decrease of 3.8 percentage points from May’s reading of 53.5 percent, indicating contraction in the manufacturing sector for the first time since July 2009, when the PMI registered 49.2 percent. The New Orders Index dropped 12.3 percentage points in June, registering 47.8 percent and indicating contraction in new orders for the first time since April 2009, when the New Orders Index registered 46.8 percent. The Production Index registered 51 percent, and the Employment Index registered 56.6 percent. The Prices Index for raw materials decreased significantly for the second consecutive month, registering 37 percent, which is 10.5 percentage points lower than the 47.5 percent reported in May. Comments from the panel range from continued optimism to concern that demand may be softening due to uncertainties in the economies in Europe and China.”
Now, if you only read the headline, one would probably panic and judging from twiiter, that is what most folks did. BUT if you read the whole repot, you would have goten a bit of a different picture.
A PMI in excess of 42.6 percent, over a period of time, generally indicates an expansion of the overall economy. Therefore, the June PMI indicates growth for the 37th consecutive month in the overall economy, but indicates contraction in the manufacturing sector for the first time since July 2009, when the PMI registered 49.2 percent. Holcomb stated, “The past relationship between the PMI and the overall economy indicates that the average PMI for January through June (53 percent) corresponds to a 3.5 percent increase in real gross domestic product (GDP). In addition, if the PMI for June (49.7 percent) is annualized, it corresponds to a 2.4 percent increase in real GDP annually.”
So, it is like we have assumed here all year so far even as the early spring numbers were coming in very strong. The recovery is progressing albeit at a tepid pace. Don’t go into hysterics when a ISM reading goes below 50, they do is quite often and a recession is not the likely result:
In fact, if you look at the chart between each recession ISM has dipped below 50 and then risen back above it. In fact, after the 2001 recession ISM dipped below 50 during February, March, April, May and June before rising above 50 again. In 1998, ISM fell below 50 from June to Dec (that is 6 straight months)….before returning to growth again. In 1995-96 we went from Aug ’95 to May ’96 without a reading above 50. I could go on but I think the point is made? This ebb and flow is totally normal on a historical basis….why do people expect this time be different?