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US Manufacturing – Double Dip?

07/07/2010

One of the better indicators for telegraphing price direction in the capital markets is the ISM Manufacturing Survey. Back in the first quarter of 2009, it was one of the critical indicators that triggered my desire to get back into the market. Let's put some perspective on the current trend in ISM and its potential forecasting of the now feared "W" shaped double dip recession.

First, keep in mind that the May ISM was 60.4; the following two reports ISM came in at 59.7 and 56.2. The last time ISM was above 60 was June 2004, suggesting a rather robust manufacturing recovery. Also keep in mind that an ISM reading above 60 is rather infrequent. The highest reading in the past fifty years was 72.1 in January 1974.

The trend in ISM can change, no doubt. Therefore, we need to watch it closely. A drop back below 50, which is the marker for manufacturing contraction or expansion, would embolden the double dip scenario. I would suggest that a drop below 50 could occur without a double dip confirmed. In fact, the early 1990 and 2000 recessions had recoveries where an ISM softening reached the upper 40s without triggering a double dip.

Several charts below offer insight from previous recessions on how "double dip" ISM readings appear, plus how typical recovery "soft patches" appear.

US ISM Manufacturing 2006-2010

Source: Bloomberg

US ISM Manufacturing 2000-2004 - Recession of March to November 2001

Source: Bloomberg 

US ISM Manufacturing 1990-1992 - Recession of July 1990 to March 1991

Source: Bloomberg 

US ISM Manufacturing 1980-1983 - Double Dip W Recession from January 1980 to November 1982

Source: Bloomberg 

US ISM Manufacturing 1972-1975 - Recession of November 1973 to March 1975

Source: Bloomberg

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