ISM manufacturing report does NOT indicate that the U.S. economy is in recession

Although the latest ISM Manufacturing Report on Business out this morning does indicate a contraction in the manufacturing sector, it does NOT indicate that the overall U.S. economy is contracting or in recession. An ISM manufacturing index reading below 50.0 indicates contraction in the manufacturing secor, but the ISM manufacturing index needs to fall to 41.1 or below before a contraction of the overall economy is indicated. As per the ISM Manufacturing release today:

A PMI in excess of 41.1 percent, over a period of time, generally indicates an expansion of the overall economy. Therefore, the PMI indicates the overall economy is growing and the manufacturing sector is contracting at this time. Ore stated, "The past relationship between the PMI and the overall economy indicates that the average PMI for January and February (49.5 percent) corresponds to a 2.6 percent increase in real gross domestic product (GDP). In addition, if the PMI for February (48.3 percent) is annualized, it corresponds to a 2.3 percent increase in real GDP annually."

Read that last sentence again: "if the PMI for February (48.3 percent) is annualized, it corresponds to a 2.3 percent increase in real GDP annually."

Alas, the historic "relationship" between the manufacturing and non-manufacturing sectors is no longer fixed and reliable in terms of predicting the dynamics of the other sectors. In fact, last month we saw a contraction of the services sector. What this means is that any weakness in the services sector is not caused by weakness in the manufacturing sector.

In short, the ISM Manufacturing report simply tells us that the economy is weak, but not whether or not the overall U.S. economy is in recession.

-- Jack Krupansky