What the survey does well is capture the directional movement within manufacturing, what it doesn’t do well is measure the magnitude of the growth or contraction. For example, 50 and above implies growth, but tells you nothing about how robust that growth might be. Some of the individual components of the report were encouraging, particularly employment and production, which had robust gains for the month. The bears may take solace in the weaker new orders component, which could be spun as a harbinger of what will occur as Cash for Clunkers and other stimulus programs expire. At Pinnacle, we don’t put too much emphasis on any one data point, as there is a lot of noise that can occur. However the trend of the data is very important. The latest data point is the third in a row above 50, which seems to confirm that the strong leading indicators we have written about previously correctly anticipated future growth.
Currently, the market appears to be in the middle of a long overdue correction where good data is being brushed over. That’s not all that surprising given recent overbought conditions, and it’s possible that negativity may intensify before this market adjustment is complete. Right now seems to be a time for investors to tune out the headline noise, and focus on the overall weight of the evidence coming out of the data we are following. There’s no guarantee how the data will unfold going forward and we will continue to remain flexible in our forecast, but the ISM data seems to reinforce the idea that the economy is in the midst of healing after a particularly nasty down cycle. If that’s true, than the cyclical bull market should have room for further upside after we work through the current rough patch.
