The December 2009 Manufacturing ISM Report On Business was released earlier today showing a reading of 55.9, the highest in nearly four years. This is the most recent of the many indicators demonstrating that the U.S. economy is in a cyclical recovery. Of note, inventories are now pointing to recovery as well. The inventories index hit 43.4 in December, up from 41.3 in November, which is higher than the 42.6 reading that is consistent with expansion. However, inventories are still contracting as they have for 44 months straight.
In the chart above, you will notice all of the major factors in the ISM index (marked in red) – new orders, production and employment – are expanding at a faster rate. Also notice that inventories are still shrinking, which gives the index the potential to go yet higher when this reverses.
So, the technical recovery has indeed arrived for the manufacturing sector. As I said in my depression piece two months ago:
A lot of the economic cycle is self-reinforcing (the change in inventories is one example). So it is not completely out of the question that we see a multi-year economic boom. Higher asset prices, lower inventories, fewer writedowns all lead to higher lending capacity, higher cyclical output, more employment opportunities and greater business and consumer confidence. If employment turns up appreciably before these cyclical agents lose steam, you have the makings of a multi-year recovery. This is how every economic cycle develops. This one is no different in this regard.
Multi-year recovery has to be your baseline scenario barring large changes in five factors: inflation, interest rates, taxes, government spending, deleveraging. I will point to these factors in a future post to explain why I expect a double dip now rather than a multi-year boom.
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