We have previously pointed out a general misinterpretation of the ISM report. The typical media interpretation, accepted by most market participants, is that a number of 50 or below shows a declining economy. This is not what the ISM finds from their own analysis, which few seem to read carefully.
Manufacturing can be as low as 42 or so while overall economic growth is still positive. This is the result of the declining role of manufacturing in the economy.
The ISM regression model (inferred from their press releases) makes it seem inevitable that the reported number will fall to 50 or below as the Fed achieves its planned slowing of the economy.
While we do not view this as cause for alarm, the market will, no doubt, have a different interpretation. Given recent data on durable goods, Chicago PMI, and jobless claims, this may be the month where we see the decline.
We rarely make short-term market calls, but this is a time for some caution, even for those (like us) who are bullish on the economy and the market.