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ISM Remains Below 50

09/05/2012

U.S. markets returned from the Labor Day holiday with the release of the first major economic report for the month of September. The Institute for Supply Management (ISM) Manufacturing Index (Figure 1.1) came in at 49.6, below last month’s 49.8 and consensus estimates of 50.0 for this month. This is the third consecutive month with a sub 50.0 reading, an unfortunate formation last presented in the summer of 2009. However, in 2009 the Index was rebounding from the 33.1 print in January 2009. That trajectory was completely different from the current declining readings. 
 
The now negative relationship between the report’s New Orders and Inventories data is also concerning. While I do not expect this to be a harbinger for an impending recession, this report will motivate investment banks to lower Q3 GDP forecasts closer to 2%, and in some cases, closer to 1.5%. Speaking of forecasts, the FOMC is reliant on forecasts for its policy initiatives. The evidence within this report, in particular the contraction in New Orders and rise in Inventories, certainly favors dovish action at the September 12-13 FOMC meeting. 
 
ISM Composition
•  New Orders: 47.1 vs. 48.0 last month
•  Inventories: 53.0 vs. 49.0 last month
     o  New Orders to Inventories:  -5.9, the weakest reading since the winter of 2009
•  Prices Paid: 54.0 vs. 39.5 last month
•  Employment: 51.6 vs. 52 last month
•  Production: 47.2 vs. 51.3 last month
•  Order Backlog: 42.5 vs. 43.0 last month         
 
Next up in terms of impactful economic data is the release of Friday’s labor report. I expect this will provide the final evidence for the FOMC to act, or not, on the 13th. 
 
Current consensus estimates for Friday’s report
•  Change in Nonfarm Payrolls +110,000 to +130,000; below last month’s +163,000
•  Change in private Payrolls +125,000 to +145,000; below last month’s +172,000  
 
Market Strategy: The composition of the report is weaker than the headline. This clearly signals that manufacturing – the stabilizing component of the 2009-2011 U.S. economy – continues to operate at stall speed. For investors, the strategy does not change. Do not yet increase allocations back to overweight for the energy, materials, and industrials sectors. They remain market weight at best. Additionally, 1.5% to 2% GDP growth is properly characterized as the “sweet spot” for corporate bonds. For investors “the trend is your friend” for corporates.
 
Figure 1.1 U.S. ISM Manufacturing, September 2008 to September 2012

Source: Bloomberg

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