Tuesday, September 01, 2009

ISM Manufacturing report shows strengthening of the economy and finally growth in the Manufacturing sector

The ISM Manufacturing Report On Business for August showed a modest expansion of the U.S. manufacturing sector for the first time since January 2008, and a continued strengthening of the overall U.S. economy. The ISM Manufacturing report has shown growth in the overall U.S. economy for four consecutive months now. The overall manufacturing index came in at 52.9, modestly above the 50.0 breakeven level. New Orders were positive for a second consecutive month. Production was positive for a third consecutive month. Backlog of Orders is now growing rather than contracting. Exports grew for a second consecutive month. The only real negative was that (manufacturing) employment continues to contract, although at a slower pace.

This report does not definitively tell us that we are completely out of the woods, but it is a patch of very green shoots.

The real bottom line here is that this report indicates that the overall economy is growing again:

The past relationship between the PMI and the overall economy indicates that the average PMI for January through August (42.2 percent) corresponds to a 0.3 percent increase in real gross domestic product (GDP). However, if the PMI for August (52.9 percent) is annualized, it corresponds to a 3.7 percent increase in real GDP annually.

There is always the risk of a double-dip recession, but for now we are on track for at least some economic growth.

There is some legitimate concern that this "spike" in the ISM Manufacturing index may be due in large part to the infamous "cash for clunkers" program. That may be partially true, but my hunch is that this program may also simply have been the straw to break the camel's back of the slowdown of manufacturing. Now, instead of wondering when the slowdown will stop, people will be producing again and simply wondering when or if the improvement may stop.

For now, the future is indeed looking a little bit brighter.

-- Jack Krupansky


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