Monday, August 1, 2011

ISM Getting Everyone Refocused

The latest Institute of Supply Management (ISM) manufacturing number came out this morning and it was disappointing (shown in the chart below). The 50.9 number was much less than the 54.5 print that was expected by the market, and predictably stocks immediately sold off on the news. Virtually every component, including prices paid, production, new orders, inventories, and employment were down from last month. Interestingly, both exports and imports showed some improvement. This comes on top of last Friday’s big downward revision to first quarter GDP to 0.4% from 1.9%. Considering that many of the other leading economic indicators have been trending lower for some time, this latest news will serve to refocus everyone’s attention on the current “transitory” soft patch in the economy.

As I wrote in this space last week, it seems like a long time since we’ve been able to focus on economic and market conditions as opposed to the amazing, entertaining, frightening, and absurd debt ceiling debate. Assuming that the compromise bill gets passed (we will know by the end of the day today), investors will begin to discount the odds of whether the bill does enough to avoid a debt downgrade, especially by Standard and Poor’s, which has been pretty clear that the deal needed to cut $4 trillion from the deficit in order to avoid a downgrade. Since this proposed legislation doesn’t get there, it is very possible a downgrade will occur over the next several weeks. For those who are keeping score, the 10-Year U.S Treasury bond yield was all the way down to 2.72% as I walked in to write this post.

In the meantime, this August may well be a replay of last August as economic indicators gradually weaken and the threat of a recession grows palpable. Last year the Federal Reserve came to the rescue with a quantitative easing program. Call me crazy, but it almost feels like home to be able to go back to wondering about QE3, unemployment, corporate balance sheets, residential real estate, consumer credit, earnings surprises, and all of the other good stuff we usually do around here.