On the edge of recession

Now we have two very interesting and very conflicting signals: the ISM Manufacturing report on Friday flipped back to indicating a very modest expansion of the manufacturing sector in January, while the ISM Non-Manufacturing report out today indicate a substantial contraction of the larger services sector in January. Nominally this weakness in services is a clear signal that we may be at the edge of a recession, but the renewed strength in manufacturing urges caution in drawing too-strong conclusions and suggests that the economy is suffering more from a degree of volatility than a clear decline.

For now, in light of the ISM Non-Manufacturing report, I will raise my chance of recession to 55%, very modestly greater than 50/50. If the ISM Manufacturing report had been weaker I would have gone to 60%. If the data is as weak next month, then I will go up to 60%. If both reports weaken further, then I will go to 65%. A third month and I will go to 70%. Five months of decline in both reports would push me to 100%. But, all of this is begging the question of uncertain future data. For now, with the current data and with the knowledge of all of the stimulus in the pipeline, I feel comfortable saying that there is only slightly greater than 50% chance of recession in 2008.

The key thing to remember is that this is only one month of data.

The renewed strength in manufacturing was primarily a rise in production as well as a surge in exports, which could save monthly GDP for January. Unfortunately, new orders contracted, so there is no sense of sustainability of this one-month improvement.

Just to be clear, the negative data for the ISM Non-Manufacturing report indicates that we could be at the edge of a recession, not that we are in a recession. Only the elapse of another four months will tell us definitively that a recession is upon us.

The real bottom line is that the Federal Reserve did the right thing with their target rate cuts over the past few weeks. Some will persist in arguing that the Fed is "behind the curve", but they are in fact right where they need to be for the job they they do, as opposed to what Wall Street might want to help line their pockets with our money.

-- Jack Krupansky