Still Manufacturing

The ISM Manufacturing Index was reported at 49.5 for February 2016, up from 48.2 in January. It was the second consecutive rise for the overall index, December being the lowest, so the “it’s all over” narrative has been flying around heavily today. Lost in the relief is that February was the fifth consecutive month below 50 (and sixth straight at or below 50). It’s also a message and condition that we have seen before, notably last summer when the ISM’s PMI rose from a low of 51.6 in April to 53.1in May and June, closely followed by re-emphasis upon “transitory.”

In fact, there is always a tendency to over-interpret monthly variations. On July 1, 2008, the ISM reported its index peaked back above 50 in June 2008 for the first time after four months of sub-50 index levels. Like today, it alleviated some recession fears particularly in the sub-components. From Reuters on July 1, 2008:

Bond appetite eased in reaction to the unexpectedly strong growth components in the June ISM report, which also showed the prices paid index rose to an almost three-decade high, fanning fears of inflation that erode bond values.

“It’s negative for bonds and pro stocks. It paints a slow growth scenario with rising inflation. That’s a tough path for the Fed to traverse,” said George Adell, fixed income strategist at Commerce Capital Markets in Jupiter, Florida.

Even the original ISM press release overstated the economic case, as the recession had already begun but misreading economic accounts especially in isolation kept alive the idea that the worst of 2008 would be just a slowdown no matter how many markets and banks failed.

Economic activity in the manufacturing sector expanded in June following four months of contraction, while the overall economy grew for the 80th consecutive month, say the nation’s supply executives in the latest Manufacturing ISM Report On Business.

That was July 2008, not July 2007, where even after Bear Stearns recession was still believed just a small possibility by far too many. The ability to ignore context and to place so much faith in “stimulus” remains ubiquitous no matter how much “market turmoil” is presented. There was a similar response into the 1990 recession, where the ISM Manufacturing PMI had fallen below 50 in early 1989 but then rebounded back to 50 by April 1990 – just two months before the official “cycle peak.”