FYI | Jul 05 2006
By Greg Peel
The ISM has been receiving a lot of attention from US economists and from Wall Street this last couple of months. The ISM is specifically the Institute of Supply Management manufacturing (or factory) index. Put simply it gauges the level of manufacturing activity. Hence it is considered a lead indicator on economic growth measures.
Apart from inflation concerns, the other concern in the US is that the economy is slowing. A little bit of slowing is not altogether a bad thing, as it will take some heat off inflation, but obviously recession is not what the world wants. It would help if China could slow down too from its frenetic pace, lest global imbalance deteriorates further, or China simply blows up.
Early Monday Bloomberg polled a bunch of US economists and found a consensus that the ISM for June would rise to 55 from 54.4 in May, indicating a pick up in activity. A reading above 50 indicates expansion, while a reading below 50 indicates contraction. The reading has been above 50 since May 2003. (The ISM surveys purchasing managers to reach its figure).
The actual result came out at 53.8 and surprised everyone. Everyone, that is, who was at work. Tuesday was the Fourth of July holiday so if the Yanks are anything like Aussies there would have only been a handful of die-hards or short straw-drawers around on the Monday. Suffice to say there wasn’t much of a response. Maybe there’ll be some fireworks on Wednesday.
In the meantime, the Merrill Lynch "global lead indicator of activity" unexpectedly bounced in June after having eased for the past four months. A lift in new orders saw this measure rise to 146.6 from 141.5 in May. The recent peak was 147.5 in February. Improvement was noted in each of the US, Japan and Europe.
Merrills points out that such unexpected bounces are not uncommon, but they usually occur during an already established recession and don’t last long. Thus the question is: is this just another dead cat bounce?
(A "dead cat bounce" is a relief rally occurring after a fall that fools some into thinking a bull market has returned. It tends to dissipate quickly and a bear market is re-established. The original expression is something like "even a dead cat will bounce if you drop it from high enough").
If this is a dead cat bounce then we may be heading for recession. If not, it could be "a new elevated base forming within the super cycle framework", according to Merills.
If the ISM bottoms through the second half and stays above 50 then base building would be apparent, says Merrills. If it slips into the 40s then we are looking at a slowing in economic growth back to the "cycle troughs of the 1990s".
On the flipside, if it’s only a dead cat bounce then central banks will quickly move to the sidelines. If it is a super cycle base forming then inflation and tighter monetary policy look imminent. It’s a little bit damned if you do, damned if you don’t at the moment, which is why economists are predicting more volatility in an uncertain second half until such things are worked through. Most are still optimistic for 2007.