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By New_Deal_democrat June 1, 2016 10:57 am
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ISM new orders and inventories: manufacturing recession has ended
New orders from the May ISM manufacturing index showed surprising strength, with a reading over 55 (blue in the graphs below) for the third month in a row, while inventories (red) continued to shrink stoutly, with a reading just above 45.  Here is a graph of new orders and inventories for the last 10 years, with both series normed to 0 to show how these two readings have correlated with the economy:
 
 
This is in stark difference to the regional Fed new orders indexes in May, all of which sank out of expansion:
 

Regional Fed New Orders Indexes

(*indicates report this week)

  • Empire State down -16.5 to -5.5
  • Philly down -1.5 to -1.5
  • Richmond down -18 to 0
  • Kansas City -3  to -3
  • *Dallas down -20.9 to -14.9
  • Month over month rolling average: -3 from -2 to -5
While I am disappointed that the regional Fed indexes did not accurately forecast the ISM index, the fact remains that the ISM index is much more reliable -- it is national and has a nearly 70 year history of reliably signaling expansions and contractions:
 
Here is the entire history of new orders and inventories from the index since its inception in 1948:
 
 
There has *never* been a recession with new orders over 55 (let alone 3 months in a row!). When inventories have contracted below the 45 reading and then improved to it, that has almost always correlated with being early in a recovery from a downturn.
 
This bodes well for May industrial production and total business sales, two of the most important coincident measures of the economy.  In short, while "it's different this time" is always a possibility, it is increasingly likely that the industrial recession led by commodity extraction and transport bottomed out in March.  Now if the Fed can pretty please manage not to cause the trade weighted dollar to spike again.
 
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