David Rosenberg explains away rogue ISM number
Posted on 02 September 2010 with 5 comments from readers
Top economist David Rosenberg was quick to explain away the rogue Institute for Supply Management number that sent US stocks sharply higher yesterday. Of course all eyes will be on the non-farm payrolls data tomorrow that will be far more conclusive.
The surge in stocks on September 1st will not last. The worst August for 10 years left room for a brief rally. So here is why Rosenberg doubts that high ISM figure:
1.Most of the regional reports were very poor in August. Either they collectively all wrong or the ISM is.
2.The share of respondents saying the experienced “growth” was 61%, the exact same as a year ago when the ISM was sitting at 52.8.
3. The ISM gain was led by employment (58.6 to 60.4 – best since December 1983) in the same month that ADP manufacturing fell 6,000 (second decline in a row – it was -11k in July when ISM employment was 58.6, so clearly the latter is proving to be, at least for now, an unreliable labour market barometer). Production also ticked up to 59.9 from 57.0 and inventories rose to 51.4 from 50.2. These are all coincident indicators, as an aside (but an important aside).
4. According to the ISM, 76% of the manufacturers surveyed said that their customer inventory levels were either “too high” or “about right”. At the turn of the year, just ahead of the big inventory swing that bolstered the GDP data, this metric was sitting at 60%. As a result, it would be folly to assume that the inventory and production categories will contribute to further ISM increases in the near- and intermediate-term. Norbert Ore, who presides over the ISM survey, had this to say about inventories: “If the inventory build isn’t voluntary then we have a huge issue on our hands.”
5. Meanwhile, the more forward-looking components dropped, though were hardly a disaster. But orders slipped for the third month in a row, to 53.1 from 53.5 in July, 58.5 in June and 65.7 in both April and May. That is still a sharp squeeze in the growth rate of capital goods-related order books. At 53.1, ISM orders index is down to levels last seen in June 2009 (but when they were rising in “green shooty” fashion).
6.Backlogs were down as well, to 51.5 from 54.5 in July, 57.0 in June and 59.5 in May (and peaked in February at 61.0). At 51.5, order backlogs stand at their low-water mark of the year.
7. Supplier deliveries (measure of production bottlenecks) eased for the fifth month in a row — to 56.6 from 58.3 in July and well off the March peak of 64.9.
8. Looking at five decades worth of data, the share of the time in which we see orders, backlogs and vendor deliveries all decline in tandem, and the headline ISM index rise, is the grand total of 1%. No wonder equities rallied so much — we just witnessed a 1-in-100 event! Bring your camera.
9. Export orders dipped to 55.5 from 56.5 — the lowest they have been since last December. If the overseas economy is rocking and rolling, then why onearth would this component be declining? Not only that, but it looks as though yet again, a good part of the inventory boost we still seem to be getting is being filled by imports — that sub-index jumped four points in August and does not bode well for the trade deficit, which subtracted 3.4 percentage points from headline GDP growth in Q2.
In a nutshell, ISM did smash consensus expectations in August but the composition left much to be desired. The coincident indicators firmed but the categories that actually lead manufacturing activity softened across the board.
As we said at the outset, the ISM index was at complete odds with the regional surveys. Philadelphia, New York, Milwaukee, Richmond and Kansas City were all down. Dallas and Cincinnati were up. In the past, when we had a 5-to-2 ratio to the downside, the share of the time ISM managed to eke out an advance was 4%.
It would be wise to lean against the market’s initial dramatic reaction to this data. The ISM orders/inventories ratio is a decent leading indicator and it sank to 1.033x from 1.065 in July. 1.278x in Julne and 1.441x in May. The hidden nugget in today’s report is that this ratio has decline to levels not seen since February 2009. And the last time it fell this fast to this type of level was in the September to December 2007 period (1.03x from 1.30x) when once again, there was tremendous confusion and intense debate over whether it was a recession/soft patch in the economy and the bear market/corrective phase in equities.
Suffice it to say that in the past 30 years, with eleven observations, ISM dropped to 47x in the three months after such a decline in the orders/inventory ratio to such a low level as is the case today. That is the average, the median, and the mode. The highest ISM reading three months hence was 51.9, so if past is prescient, today’s data was likely a huge headfake.
5 Comments posted by readers:
Head-Fake Indeed!
David Rosenberg is one of the very, very few US economists who tells the truth, and who is not afraid of putting the US government in its place as a liar and manipulator.
The US government is now the Chief Manipulator of the stock market, the bond market, the commodities markets (especially silver and gold), unemployment data, manufacturing indices, etc. etc.
There’s no confidence anymore . . . and yet the US government wonders why the US citizen has such a very low opinion of the politicians and federal bureaucrats in DC.
He might be right, but many of the bad economic numbers for the last 2 months have just been revised to be better than first thought, and the Dow futures are up over 100 points again. Only half as many jobs have been lost as were expected. Private business is creating an average of 70,000 US jobs a month this year. A double dip THIS year is looking increasingly unlikely. I was starting to worry that my year end target of Dow 11,800 was in trouble. But it looks like the GDP will stay positive, so cash will continue to flow into the casino on Wall Street until the next crisis breaks. Just think if that Greece crisis hadn’t happened. Stay tuned for an announcement of a suspension of the payroll tax for companies that hire new workers by Obama as a Democratic election booster. Too bad he waited far too late. The Republican Party control of the US Congress will be fun to watch. The foreign exchange folks got the numbers 15 seconds before they were released. That is when the market started a big move. ‘Less bad than expected’ continues to work its market magic. The panic of continuing complete Democratic rule is over on Wall Street. It will be interesting to see how long it takes the for the rapidly growing National Debt bomb to explode. That could take several more years.
Oh, Bill . . . Oh, Bill !:
Bill, I usually agree with much of what you post, and today’s post is no exception . . . but
There were several things you said that caused my knee to jerk a bit!
3rd Qtr GDP:
OK, I’ll take that bet with ya . . . I think that, unless the government HEAVILY manipulates the GDP data, our 3rd Qtr GDP will be slightly negative.
Democratic Rule???
Hmm, we’ve had very little democratic rule over the past 10 years (or even over the past 30 years!). Whatever little was left of our democracy flew out the window in January 2009.
obewon, I will be shocked if the 3rd quarter GDP is actually negative. My guess for 3rd quarter GDP is about + 0.7 %. I was mostly guessing about how the stock market will behave until the usual Christmas rally is over. I think the market will continue to go up, until the next negative GDP number is rumored. I expect the 4th Q GDP to be near zero, but still slightly positive, maybe +.4 %. Whenever the first negative GDP number is formally announced, I think that the stock market will take a huge fall, and could continue down for a year.
As far as politics, my sister said it best with two letters, TV. The very wealthy took control of the US government when they realized that expensive TV advertising could get their guy elected, more often than not. It is harder to do with the President, because more people pay close attention to the TV debates, that for the Congressional elections. With enough money for local TV advertising, you can get anyone with an above average intelligence, and who isn’t physically unattractive, elected to the US Congress. The very rich know it, and act accordingly. They spend a little, in order to save a lot down the road.
That is the problem, both political parties are now controlled by the super rich. Look at the number of people from Goldman in Government financial positions. They are everywhere. The deregulation of the financial system, which they pushed through the Congress with the help of BOTH parties, made them billions, but nearly destroyed the financial system. In the process, they have created a National debt bomb, which will be extremely difficult to defuse. If you ever get the time, CNBC often plays two great specials on holiday weekends that are eye openers. ‘House of Cards’ is the brilliant, award winning story of the subprime mess. ‘Untold Wealth, the Rise of the Super Rich’ shown how rich the rich in America really are. I believe that many people getting fabulously wealthy would be a great thing, if, in doing so they had : 1.) Shouldered their fair share of the tax burden in order to prevent the National debt from exploding to levels that now threaten us all, and 2.) Not earned much of their wealth through the creation of risky financial products that incurred vast losses, which they then got transferred to the Government, while they made out like bandits. Look at the hundreds of millions of dollars some of the Wall Street bankers walked away with during the last two decades. Their reckless actions cost us trillions in additional National debt. People should be rewarded for success, not failure. Thousands of people who committed financial fraud have not been prosecuted. And the statute of limitations is running. Last year the New York Times had an article about how private equity funds were actually taking control of companies and essentially looting them, while the new managers paid themselves millions. It was about a matress company and was a truly shocking story of greed. Such actions are fast ruining the US economy. In the end, greed is not good.
All I know for sure, is that my lower back is killing me from twisting around to see where I was backing up the Expedition last night inside the Stennis Space Center acoustic easement, while searching for a dark spot to use my new 17.5 inch reflecting telescope. Hey, I’m helping put people back to work. At least I finally found a spot that is dark enough to see the part of the Milky Way that is directly overhead. Of course, it is a little used, but still open road, which might be a slight problem. It rains so much here you have to stay on pavement, or crushed rocks, in order to avoid the mud and wet cut grass that sticks to everything. I might buy some of those orange traffic cones and a couple of ‘road closed’ signs. Then you need to avoid the ubiquitous 80 foot tall pine trees that don’t know to stay away from the roads. The damned things grow like weeds. I wish the vapor light had never been invented! At least I saw a deer and avoided being picked up by a UFO, like the two fishermen near Pascagoula, or being bitten by one of the thousands of poisonous snakes that inhabit the swampy area. ( NASA took all the good, high land.) I did discover one thing that did amaze me, along US Route 190. The State of Louisiana has discovered full cutoff light fixtures that send the light down, instead of out. In spots, we can actually drive at night without wearing sunglasses. Now if only we can teach the drivers that you don’t need to use your high beams on well lit roads.
Have a great Labor Day Holiday.
@Bill: . . . enjoyed your very looong rant on a variety of topics.
Four reactions to what you’ve said:
1. your “rants” would be more easily readable if you didn’t have it all in just one paragraph. Lol!
2. yeah, I’ve read a ton of relevant stuff on how the rich got insanely rich. What is particularly sad about their huge gains is the fact that it has come at the expense of middle America, whom they have repeatedly raped.
3. I’m willing to bet any amount of money that “whatever the initial 3rd Qtr GDP number is, it will be revised downward by the end of the year.
and lastly,
4. I believe that the current administration has to manipulate the 3rd Qtr GDP number; it’s release is just too close to the elections.
P.S. For another sobering look at a potentially negative 3rd Qtr GDP forecast, see Rosenberg’s comments here:
http://www.businessinsider.com/david-rosenberg-heres-5-signs-that-the-economy-began-the-double-dip-in-q3-2010-9