ISM Composite Index - Continues Decline
The recent trend of weakness in the manufacturing indexes continued today with the release of the Institute of Supply Management Non-Manufacturing Index. The index came in weaker than expected, which was expected by us anyway, at 52.7 with deterioration in most of the sub-components especially in new orders, employment and backlogs which all point to further economic weakness ahead.
New orders, which were in the 60s as recently as March, fell nearly two points to 51.7 and are now testing the monthly break even level of 50 very likely we will see this decline into contractionary territory in the months ahead reflecting what the backlog orders are already telling us which are already well below 50 and came in down 4-1/2 points in the month to 44.0. Weak orders do not point to overall strength in the months ahead.
As far as employment goes - the numbers looked pretty miserable here as well and coincides with the recent jump in layoff announcements in todays release of the Challenger Layoff Report. The employment component slid to 52.5 vs 54.1 in June.
The Trend Is Your Friend
Analysts were quick to point out that the number wasn't pointing at a recession - however, the trend is clearly confirming that we are headed to one. Waiting to be IN the recession before proclaiming you see one does little to be of any use to investors. This is why we run several composite indexes, like our ISM composite, which gives us a much better read on where the economy is and where it is headed. We recently released our STA Economic Output Composite Index which is also confirming a much weaker economic environment as well and is very close to signaling a recession as well. Finally GDP, on a year over year basis, is also signaling that we are at levels that usually signal we are in a recession or about to be in one.
While most individuals will tell you that we never left the recession in the first place; the statistical recession ended in June of 2009. Our recent prediction that we will be in recession by the beginning of 2012, barring another injection of QE by the Fed, is currently being supported by the majority of the economic data.
The reason that I tell you this is that stocks CAN NOT stay detached from the economy for long as they are a direct reflection of the overall economy. During a normal recession stocks lose on average 33% and with our current debt issues, the Eurozone crisis and a host of banks on the verge of bankruptcy there is likely that the next recession will be anything BUT normal.