Business conditions continued to deteriorate, remaining below 50% for the seventh consecutive month, but the deterioration isn’t intensifying. The Morgan Stanley Business Conditions Index (MSBCI) increased by four points in early December to 44%, retracing some of November’s decline. The less-volatile three-month moving average edged up two points to 43%, the highest level since August. At 43%, the fourth quarter average only stands one point above the third quarter average, meaning analysts are essentially just as pessimistic in the current quarter as they were last quarter.
Last month we noted that our bullish forecasts were out of sync with gloomy analyst reports, although we admitted that analysts were more accurate on conditions in the 3rd quarter than we were. Earlier this week, given incoming data, we sharply lowered our near-term GDP forecast, with the three quarter growth rate ending in 1Q07 averaging only 2%. However, there are also glimmers of improvement: A positive employment report and a blow-out retail sales report have led us to revise our current quarter GDP tracking estimate up 0.9 pp to 2.5%. Furthermore, advance bookings were higher in the Empire State manufacturing survey. Score: Analysts 1: Economists 1? The jury is still out!
So, according to the Morgan Stanley index things are somewhere between OK and bad, but they aren't getting any worse. Given that GDP growth has slowed this year, that's to be expected. A slower growth environment puts business on the defensive, forcing them "pull in their wings" as it were.
The above report jibes with the latest ISM manufacturing survey:
Economic activity in the manufacturing sector failed to grow in November for the first time following 41 consecutive months of growth, while the overall economy grew for the 61st consecutive month, say the nation's supply executives in the latest Manufacturing ISM Report On Business®.
WHAT RESPONDENTS ARE SAYING ...
* "Sales have leveled off, but we will have a record year. Second [year] in a row." (Computer & Electronic Products)
* "Business has softened in the past 60 days. Down about 20 percent." (Fabricated Metal Products)
* "Housing market slowed down." (Furniture & Related Products)
* "We have hit another slow period in receiving new contracts. Quoting activity is fair." (Machinery)
* "We are still trying to hire new maintenance techs, but find it difficult to find qualified people." (Nonmetallic Mineral Products)
So, manufacturing registered its first decline in 41 months. Nothing lasts forever. We'll have to wait and see if this trend continues or whether this is statistical noise on the radar screen. While I don't know how the ISM chooses quotes for the "What respondents are saying" section, I would think they are choosing one quote that would be representative of a number of responses. If that is the case, pay particular attention to the housing comment. Also not the time frame mentioned --
"in the last 60 days". That means it could get worse as housing continues to contract.
However, the non-manufacturing sector showed an increase in activity:
Business activity in the non-manufacturing sector increased at a faster rate in November 2006, say the nation's purchasing and supply executives in the latest Non-Manufacturing ISM Report On Business®.
WHAT RESPONDENTS ARE SAYING ...
* "Business still strong." (Utilities)
* "New job orders and new and repeat job awards have increased in October and November." (Professional, Scientific & Technical Services)
* "Sustained lower energy costs driving customer commitment and increasing operational objectives." (Accommodation & Food Services)
* "Generally improving outlook about the economy." (Educational Services)
* "The market has not changed in the past month. Sales are slow and order cancellations are still high. The forecast for the next 30 - 60 days is the same." (Construction)
It's important to note that Professional Services, Technical employees and education services have all shown strong employment gains over the last year or more. This indicates these industries are doing well in this expansion. However, the comments above indicate they are still doing well, which may help to ameliorate the negative impact from a drop in manufacturing.
So the picture looks mixed at this point with manufacturing possibly moving into a slowdown and non-manufacturing still doing well.
