Recovery On?

Last week, we had several very positive economic reports -- both ISM indexes increased and the employment report was surprisingly good (we also saw increases in PMIs from other countries: China, India and Britain). That led me to start thinking whether or not the recovery -- which was on track until May and then dropped like a stone -- is back on track. Before I get to that, let's look at a few very important events over the last approximately six months to get a handle on what has been happening.

The Greek crisis started in April, when a massive budget deficit was announced. Much confusion and fear followed, with the ECB eventually agreeing on a bail-out package in early May. However, by then the damage was done. There was talk of bail-outs and impending crisis throughout the EU area. This event led to a big spike in Libor, which is a very important short-term funding rate that is used throughout the world. As such, there was tremendous negative pressure in economies throughout the world.

In the US, we had several events that hurt the domestic recovery. The first was the expiration of the first time homebuyer tax credit. The tax credit boosted sales through the summer, but led to a massive drop-off in sales after expiration. Secondly, there was repeated budget wrangling in Washington regarding unemployment benefits and aid to states. This on again/off again situation created havoc at the state level, where some states had already budgeted in federal grants, only to have to scramble when the aid was not forthcoming. Third, we had the BP gulf disaster, which had a negative impact on the gulf states.

So, through the end of the summer there were several events that "stalled" the recovery that was progressing at a good pace until say March. Note that overall GDP growth did not crash, although it did slow. However, last week there were three economic releases that gave signs the recovery -- which has been frozen for the last approximately six months -- is back on.

The first sign of this was the rally in industrial metals.


Click for a larger image.

Prices fell in reaction to the Greek crisis, but started to rally at the beginning of the summer and are now in a strong rally.

In addition, last week three indicators were released that showed considerable strength in the economy.

ISM Manufacturing:

"The manufacturing sector grew during October, with both new orders and production making significant gains. Since hitting a peak in April, the trend for manufacturing has been toward slower growth. However, this month's report signals a continuation of the recovery that began 15 months ago, and its strength raises expectations for growth in the balance of the quarter. Survey respondents note the recovery in autos, computers and exports as key drivers of this growth. Concerns about inventory growth are lessened by the improvement in new orders during October. With 14 of 18 industries reporting growth in October, manufacturing continues to outperform the other sectors of the economy."

.....

Of the 18 manufacturing industries, 14 are reporting growth in October, in the following order: Apparel, Leather & Allied Products; Primary Metals; Petroleum & Coal Products; Machinery; Electrical Equipment, Appliances & Components; Miscellaneous Manufacturing; Fabricated Metal Products; Paper Products; Printing & Related Support Activities; Transportation Equipment; Computer & Electronic Products; Food, Beverage & Tobacco Products; Plastics & Rubber Products; and Chemical Products. The two industries reporting contraction in October are: Nonmetallic Mineral Products; and Furniture & Related Products.

Let's take a look at some numbers from the report:

Manufacturing continued to grow in October, and at an accelerated rate as the PMI registered 56.9 percent, an increase of 2.5 percentage points when compared to September's reading of 54.4 percent. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.

As the chart of the composite index shows, the overall number was slightly weaker month to month for the last few months, although it never dropped to recession levels. However, last month's print was incredibly strong, as noted by the report. In addition, individual components were strong.

ISM's New Orders Index registered 58.9 percent in October, which is an increase of 7.8 percentage points when compared to the 51.1 percent reported in September. This is the 16th consecutive month of growth in the New Orders Index and the largest month-over-month improvement since January 2009. A New Orders Index above 50.2 percent, over time, is generally consistent with an increase in the Census Bureau's series on manufacturing orders (in constant 2000 dollars).

The 11 industries reporting growth in new orders in October — listed in order — are: Apparel, Leather & Allied Products; Petroleum & Coal Products; Miscellaneous Manufacturing; Primary Metals; Plastics & Rubber Products; Electrical Equipment, Appliances & Components; Fabricated Metal Products; Machinery; Food, Beverage & Tobacco Products; Computer & Electronic Products; and Transportation Equipment. The five industries reporting contraction in October are: Nonmetallic Mineral Products; Printing & Related Support Activities; Wood Products; Chemical Products; and Furniture & Related Products.

The chart above shows the new orders index was dropping and getting close of overall recessionary levels. However, last month's increase was the strongest we've seen in nearly two years.

ISM's Production Index registered 62.7 percent in October, which is an increase of 6.2 percentage points from the September reading of 56.5 percent. This is the largest month-over-month improvement since January 2010. An index above 51 percent, over time, is generally consistent with an increase in the Federal Reserve Board's Industrial Production figures. This is the 17th consecutive month the Production Index has registered above 50 percent.

The 11 industries reporting growth in production during the month of October — listed in order — are: Apparel, Leather & Allied Products; Primary Metals; Fabricated Metal Products; Electrical Equipment, Appliances & Components; Miscellaneous Manufacturing; Machinery; Transportation Equipment; Paper Products; Computer & Electronic Products; Food, Beverage & Tobacco Products; and Chemical Products. The two industries reporting contraction in October are: Nonmetallic Mineral Products; and Furniture & Related Products.

Here's a chart of the data:


The overall index dropped for a few months -- but again, never to recessionary levels -- and printed a strong number last week.

Interestingly, both apparel and leather goods (consumer non-durables) showed an increase, probably in anticipation of the holiday shopping season.

The manufacturing sector was pointing toward a slowdown. But the latest ISM number was very strong, indicating a new round of strength might be approaching.

Let's turn to the ISM non-manufacturing index:

"The NMI (Non-Manufacturing Index) registered 54.3 percent in October, 1.1 percentage points higher than the 53.2 percent registered in September, and indicating continued growth in the non-manufacturing sector at a slightly faster rate. The Non-Manufacturing Business Activity Index increased 5.6 percentage points to 58.4 percent, reflecting growth for the 11th consecutive month at a substantially faster rate than in September. The New Orders Index increased 1.8 percentage points to 56.7 percent, and the Employment Index increased 0.7 percentage point to 50.9 percent, indicating growth in employment for the second consecutive month and the fourth time in the last six months. The Prices Index increased 8.2 percentage points to 68.3 percent, indicating that prices increased significantly faster in October. According to the NMI, 11 non-manufacturing industries reported growth in October. Respondents' comments remain mixed about business conditions and vary by industry and company. The trend of the overall comments indicates that there are signs of economic stabilization."

Let's look at the data:

In October, the NMI registered 54.3 percent, indicating continued growth in the non-manufacturing sector for the 10th consecutive month. A reading above 50 percent indicates the non-manufacturing sector economy is generally expanding; below 50 percent indicates the non-manufacturing sector is generally contracting.

This number dipped a bit over the last few months, but not to the degree as the manufacturing number. However, last month the overall index printed an increase.

ISM's Non-Manufacturing Business Activity Index in October registered 58.4 percent, an increase of 5.6 percentage points when compared to the 52.8 percent registered in September. Ten industries reported increased business activity, and three industries reported decreased activity for the month of October. Five industries reported no change from September. Comments from respondents include: "Continued strength in core businesses and capital expenditures for balance of 2010" and "Increase in service calls/requests for service."

Let's take a look at the data:


This number was decreasing for three straight months, but last months print was incredibly strong. And there was also a nice jump in new orders

ISM's Non-Manufacturing New Orders Index grew in October for the 14th consecutive month. The index registered 56.7 percent, which is an increase of 1.8 percentage points from the 54.9 percent reported in September. Comments from respondents include: "Orders awarded that have been on customer hold" and "New projects approved."

The 10 industries reporting growth of new orders in October — listed in order — are: Professional, Scientific & Technical Services; Mining; Educational Services; Finance & Insurance; Transportation & Warehousing; Accommodation & Food Services; Retail Trade; Information; Wholesale Trade; and Public Administration. The three industries reporting contraction of new orders in October are: Other Services; Construction; and Health Care & Social Assistance.

Bottom line: the ISM services looks to be improving as well.

However -- let me add a big caution: this is one month of data. The fact both prints occurred within a week and showed strong levels is important, but should be kept in perspective.

Finally, last week the employment report printed its best numbers in a long time . I covered this report here and here.

There are still issues in the economy that need to be addressed. The big one is initial unemployment claims, which are still printing in the 4500,000/week range. That number has been troubling me since the mid-summer. Oil is now at $86/bbl and approaching key price levels that could hurt a recovery. There are still states that need to pretty big help.

However, the pace of the good numbers last week and the fact they occurred is such a short time span is encouraging.