Chart Of The Day: ISM Composite Index
With the recent release of the March ISM Purchasing Manager surveys I can now compile the ISM Composite Index. In March the manufacturing survey declined from 54.2 in February to 51.3 in March while the non-manufacturing survey fell from 56.0 to 54.4. Both of these surveys had been in declines since February of 2011 but received a temporary bump from the rebuilding/resupply process following Hurricane Sandy last November. That effect now seems to be fading.
The chart of the day is really two charts. The first chart below is the ISM Composite index overlaid against the two individual surveys.
As we have discussed many times previously the individual data points from one month to the next mean very little. This is because various events, such as weather, can create short term anomalies in the economic data. For example, the surveys showed improvments recently due to the rebuilding/resupply process post Hurricane Sandy. That boost is now beginning to fade. However, the longer term trends of the data smooth out volatility in the data to reveal a clearer picture about the relevant strength and direction of the economy.
What the chart above clearly shows is that the economy peaked in the first quarter of 2011 and has been getting weaker ever since. This is confirmed by many other economic data points that I follow and discuss on this site. While the composite index is currently still above the 50 level, which denotes the difference between expansion and contraction, the current trend of the data suggests that we will witness weaker economic growth in the months ahead.
I realize that such thoughts are considered almost heresy as the markets surge to all-time highs, however, as the chart below shows we have witnessed such a disconnect previously.
You will note that the correlation between the ISM Composite index and the stock market was much closer at the turn of the century than it has been in the last two cycles. The difference between the peak of the ISM Composite in 2000 versus the peaks in 2004 and 2011 is the flood of liquidity that was fueling the speculative rise in asset prices. Even though the ISM Composite started signaling a much weaker economy as it fell below the 55 level in 2006 it was mortgage equity withdrawals and a debt boom that continued to push asset prices to excess.
We are once again witnessing the same phenomenon as the flood of liquidity from the Federal Reserve ramps asset prices back to historical extremes even as the ISM Composite signals a weaker economic environment ahead. Either the economy is set to boom and catch up with the stock market, which is the hope of virtually all mainstream economists and analysts, or the markets will revert to reality. History shows it will be the latter.
However, these disconnects from reality can last far longer than logic would dictate. The markets have been struggling lately, and are subject to a short term correction, but with the Fed still fully engaged in liquidity support, along with the BOJ and ECB, it is likely that the market can remain elevated a while longer. As stated such elevation will not last forever in the meantime we remain at target portfolio weights until the current positive trends become broken.