ISM Manufacturing Report shows accelerating expansion
The PMI Index for the December 2010 Manufacturing ISM Report On Business® released this morning increased to 57.0% from 56.6% in November. With 50 seen as the demarcation between expansion and contraction, the report shows a manufacturing sector well into the expansion phase.
The Institute for Supply Management wrote:
A PMI in excess of 42 percent, over a period of time, generally indicates an expansion of the overall economy. Therefore, the PMI indicates growth for the 20th consecutive month in the overall economy, as well as expansion in the manufacturing sector for the 17th consecutive month. Ore stated, "The past relationship between the PMI and the overall economy indicates that the average PMI for January through December (57.3 percent) corresponds to a 5.1 percent increase in real gross domestic product (GDP). In addition, if the PMI for December (57 percent) is annualized, it corresponds to a 5 percent increase in real GDP annually."
That’s as good as it gets in the US. I would like to see the regression they did yielding a 5.1% real GDP growth. Clearly, this is well above the growth that the economy actually delivered, suggesting that either the regression is pro-cyclical or that the correlation between manufacturing growth and economic growth has abated.
The PMI peaked in April at 60.4%, declining to a early cycle trough of 54.4% in September. So the economic slowdown that economists like Albert Edwards predicted did materialise – and it was bearish for shares as he had indicated. However, this effect was very short-lived. Since September, government bonds have been getting whacked. Judging from the chart below, the US economy still has a decent amount of momentum. Inventories are finally growing but there is plenty of room for more.