Wednesday, September 11, 2013

The Moderate Expansion Continues; ISM Adds Bullish Fuel

Last week the Federal Reserve Released the Beige Book, which shows (surprise) a continued moderate expansion.

Reports from the twelve Federal Reserve Districts suggest that national economic activity continued to expand at a modest to moderate pace during the reporting period of early July through late August. Eight Districts characterized growth as moderate; of the remaining four, Boston, Atlanta, and San Francisco reported modest growth, and Chicago indicated activity had improved. Consumer spending rose in most Districts, reflecting, in part, strong demand for automobiles and housing-related goods. Activity in the travel and tourism sector expanded in most areas. Demand for nonfinancial services, including professional and transportation services, increased slightly on net. Manufacturing activity expanded modestly. Residential real estate activity increased moderately in most Districts, and demand for nonresidential real estate gained overall. Lending activity was mixed. Lending standards were largely unchanged, while credit quality improved. Demand for agricultural products was strong during the reporting period, but growing conditions and production in some areas were somewhat weak as a consequence of extreme weather. Demand for natural resource products was stable or up slightly, and extraction increased in anticipation of further demand growth. 

But two releases last week added bullish fuel to the economic argument in the guise of the ISM manufacturing and service numbers (we've already covered the ISM numbers in two posts see here and here).

The ISM manufacturing number was strong:

The PMI™ registered 55.7 percent, an increase of 0.3 percentage point from July's reading of 55.4 percent. August's PMI™ reading, the highest of the year, indicates expansion in the manufacturing sector for the third consecutive month. The New Orders Index increased in August by 4.9 percentage points to 63.2 percent, and the Production Index decreased by 2.6 percentage points to 62.4 percent. The Employment Index registered 53.3 percent, a decrease of 1.1 percentage points compared to July's reading of 54.4 percent. The Prices Index registered 54 percent, increasing 5 percentage points from July, indicating that overall raw materials prices increased when compared to last month. Comments from the panel range from slow to improving business conditions depending upon the industry."

Here's a chart of the number:

The two most recent readings show strong upward movement, rising higher than all levels seen before the 1Q11.  15 of the 18 industries reported growth.  Last week, NDD noted the new orders index is very bullish for the next few months.

The anecdotal quotes are a bit less bullish, however:
  • "Slight improvements in both domestic and international sales." (Fabricated Metal Products)
  • "Business is slowing down, not sure why — but we may end up below last year's sales levels, whereas we had forecast 6.5 percent growth." (Miscellaneous Manufacturing)
  • "Material prices continue to be favorable; business is steady." (Paper Products)
  • "Slowing down slightly, but still stronger than last year by 20 percent." (Furniture & Related Products)
  • "Military slowdown affecting business." (Computer & Electronic Products)
  • "Summer seasonal businesses are doing well after a late start." (Printing & Related Support Activities)
  • "Still not seeing the year we had expected. Cautious about the balance of 2013." (Machinery)
  • "Tight government spending still affecting business." (Transportation Equipment)
  • "With improved weather outlook in the central states, agricultural prices are relaxing year over year." (Food, Beverage & Tobacco Products)
  • "We have benefitted from the Yen; seeing a 20 percent decrease in material costs from 2012 to 2013." (Chemical Products)
 Several industries are reporting a slowing with the only visible cause being sequestration.  However, no one is foreseeing an imminent collapse.  And even with the recent slowing, the year over year numbers are still higher.

Let's turn to the services number:

"The NMI™ registered 58.6 percent in August, 2.6 percentage points higher than the 56 percent registered in July. This indicates continued growth at a faster rate in the non-manufacturing sector. This month's NMI™ is the highest reading for the index since its inception in January 2008. The Non-Manufacturing Business Activity Index increased to 62.2 percent, which is 1.8 percentage points higher than the 60.4 percent reported in July, reflecting growth for the 49th consecutive month. The New Orders Index increased by 2.8 percentage points to 60.5 percent, and the Employment Index increased 3.8 percentage points to 57 percent, indicating growth in employment for the 13th consecutive month. The Prices Index decreased 6.7 percentage points to 53.4 percent, indicating prices increased at a significantly slower rate in August when compared to July. According to the NMI™, 16 non-manufacturing industries reported growth in August. The majority of respondents' comments continue to be mostly positive about business conditions and the direction of the overall economy."

The chart shows the recent strength of the number:

The anecdotal stories are more bullish than the manufacturing sector:

  • "High demand for products is driving expansion." (Management of Companies & Support Services)
  • "We continue to see growth in the retail and wholesale sectors of our business, and expect to see new orders for our products continue to grow as well." (Information)
  • "We seem to have a flurry of activity in our pipeline." (Construction)
  • "Business orders are up and improving. Still concerned about sustainability through Q4." (Professional, Scientific & Technical Services)
  • "Experiencing a strong housing rebound and continued solid performance by the tourism sector." (Public Administration)
  • "Conditions continue to show improvement." (Retail Trade)
  • "Generally slow, increasing economy." (Transportation & Warehousing)
These combined reading of the ISM numbers is the economy is ripe for higher growth.  Manufacturing new orders numbers are very bullish while the service sector appears to be on very solid ground.