The first look at how manufacturing activity fared in 2012's final month is the ISM report later this week. The stakes are higher than usual, as the nation braces for blowback from the still-unresolved fiscal cliff mess. Much like the political dialog in Washington these days, the December update on the ISM Manufacturing Index (scheduled for release on Wednesday, January 2) is expected to dance on the edge of a knife and remain precariously poised on or near the neutral 50-mark. The Capital Spectator's average econometric forecast anticipates a reading of 49.9, a statistical hair into the terrain of contraction, or moderately below the relatively upbeat 50-plus predictions from economists generally via consensus survey data.
Here's a closer look at the numbers, followed by brief definitions of the methodologies behind The Capital Spectator's projections.
VAR-2: A vector autoregression model that analyzes two economic time series in search of interdependent relationships through history. The forecasts are run in R with the "vars" package using historical data for the following indicators: ISM Manufacturing Index and industrial production.
VAR-9: A second VAR model (see overview above) uses nine indicators: ISM Manufacturing Index, industrial production, private non-farm payrolls, index of weekly hours worked, U.S. stock market (S&P 500), real personal income less current transfer receipts, real personal consumption expenditures, spot oil prices, and the Treasury yield spread (10-year Note less 3-month T-bill).