ISM Composite Index - Been Here Before
Been there. Done That. That is how the saying goes anyway. Today we saw the release of the ISM Non-Manufacturing Index which came in lower than the read last month. Of course, as usual the media was replete with reports about the strength of new orders and backlogs but bounces in negative trends are hardly something to get excited about. If things were improving internally there would not have been such a steep drop in employment which, by the way, doesn't bode well for Friday's jobs report.
Our composite ISM index (a weighted average of both the Manufacturing and Non-Manufacturing Reports) tells us the real story. Since obtaining its stimulus fueled peak in February of 2011 the weakness in the economy has been pervasive. As stated before, nothing descends in a straight line, and as businesses get drawn down to certain points there will be fits and starts of activity. With all due respect to the media - this doesn't mean that economy has bottomed and that a recovery has begun. It is a tentative bounce in downtrend.
Let's take a look at the last time we were here and you will see what I mean:
- The composite index is now at levels that we saw in September of 2007.
- The level then was after a much longer decline from the previous peak of 65 in January of 2004.
- The index is currently declining from a peak of 65 in February of this year.
- The current decline is much sharper than previous showing extreme weakness.
- The index bounced from September to October of 2007 to a reading of 53.1 prompting media exclamations of economic recovery.
- The recession started in December of 2007 just two months later when the index rang in at 51.7.
- Breaking the components down into their individual parts the Manufacturing Index is at 51.6 and the Non-Manufacturing Index is at 53. Both indices are where they were in November of 2007.
In 2007, the Fed, mainstream economists, media and analysts were all talking about a soft landing scenario. Bernanke was cutting interest rates and Bush was flinging out tax cuts in order to keep the economy from stalling. It worked momentarily but ultimately failed.
Currently, we have Ben on "The Hill" talking about more support for the markets and the economy. Obama talking about tax cuts for businesses. Europe dolling out potential billions in an all-out effort to bailout the Eurozone. Faces may be different but the game remains the same.
Which is why all of this seems to strangely familiar for me. The point to be made here is that "a" number doesn't tell us anything about the state of the economy especially when there are seasonal factors involved. However, the trend is much more telling and that is clearly negative. The recession is coming whether we like it or not. While it most likely will not be as bad as it was in 2008 it will still drag earnings and stocks lower putting pressure on consumers and the economy. Businesses in turn will retrench driving unemployment higher and the negative cycle ensues.