ISM Manufacturing report not as bad as it seemed

The ISM Manufacturing Report on Business for December was somewhat of a disappointment, showing a contraction fo the manufacturing sector in December, but it was not as bad as it first seemed. Yes, it showed a contraction of the manufacturing sector, but not by enough to indicate a contraction of the overall economy. In fact, according to the report, "if the PMI for December (47.7 percent) is annualized, it corresponds to a 1.8 percent increase in real GDP annually." That is in fact a higher rate of GDP growth than many forecasters are suggesting for Q4, and that would be if October and November has been at December's low PMI, while in fact those two months were significantly better.

The ISM Non-Manufacturing Report on Business on Friday will tell us how the services sector was doing in December.

In summary, as weak as the ISM report seemed, it probably indicates that Q4 GDP will come in at 3.0% or better.

Incidentally, according to ISM, the manufacturing PMI would have to fall below 41.9 before a contraction of the overall economy would be indicated.

Still, the relative weakness of the ISM Manufacturing report would suggest that the Fed will be a little more likely to cut its target rate again at the end of the month. We'll have to see how the ISM Non-Manufacturing report and the monthly employment report do on Friday. My forecast: mixed.

Incidentally, the construction spending report for November showed a gain despite a continued decline in residential construction. Nonresidential construction continued to grow faster than residential construction spending is declining. But, that was for November and it will be another month before we get the construction spending report for December.

-- Jack Krupansky