Thursday, March 3, 2016

February ISM manufacturing suggests slowdown still has a ways to go

 - by New Deal democrat

I wrote a month ago that before either an inventory slowdown or a recession end, the new orders sub-index of the ISM Manufacturing Index turns up first.  The inventories component tends to trough at the end of a recession, or sometimes bounce along a bottom for a few months.

Last month I compared ISM new orders (red in the graph below) with real GDP.  A similar order occurs with Industrial production (blue):

It was encouraging one month ago that new orders were above 50 showing expansion.  

So what happened this month?  Once again new orders were positive (red in the graph below). Inventories, however, also ticked up slightly (blue):

Note, by the way, that both new orders and inventories are consistent with levels we saw during past non-recession inventory corrections, in 1996, 2002, and 2012.

For me to be confident that this slowdown was ending, I would want to see new orders spike to at least 54.  They didn't do that. That doesn't mean that I expect things to get worse.  In fact there are encouraging signs in things like steel production and rial shipments that we may have bottomed.  The failure of new orders to pick up means at least that we aren't out of the woods yet.