The Reports on Business by the Institute of Supply Management (ISM) showed overall positive news even with a marginally lower headline NMI for non-manufacturing by 0.3 to 53%. Both headline numbers came above consensus of 50.5 & 50.6 with an actual number of 51.6% for manufacturing, and consensus of 52.7 & 52.9 with actual number of 53% for non-manufacturing. Both were within the consensus ranges provided from Econoday with a range of 49 to 52% for manufacturing and 51.3 to 54.2% for non-manufacturing.
Comparing the U.S. manufacturing index to World-Wide Factory Activity indexes shows that the U.S. was among the minority that experienced growing expansion of the manufacturing index. Over two-thirds of the sample countries experienced a drop in the month-over-month index. The positive news of the U.S. manufacturing increasing the index by 1% even inspired economist Dan Greenhaus of BTIG LLC to conclude that the "United States was not in a recession in the third quarter." Considering that the manufacturing sectors of the economy is minority share of the U.S. economy, I would not be so confident of such declarations.
Trends are Over
Technically, there may be little possibility of a double dip recession coming now, but with unemployment stubbornly staying above 9%, then hardly anyone will be considering the U.S. economy being healthy. That opinion would be widely agreed to from Tea Party members to Occupy Wall Street (OWS) crowds.
A major concern of this blog, the Macro View of the Markets, is the price indexes in the ISM reports and commodities with rising prices. The price index for manufacturing increased slightly to 56% by 0.5 and dropped 2.3 to 61.9% for non-manufacturing. From a macro perspective on the economy, price indexes in the mid fifties to low sixties might be good for now considering the overhanging threat of deflation. This blog also has been tracking and graphing the number of commodities up in price and commodities that have multi-months with rising prices. (Below are the two graphs of manufacturing and non-manufacturing respectively.)
Until the economy starts heating up again, or more precisely the world wide economy, then worries about commodity prices and price levels are of secondary concern compared to the unemployment rate and this has been at least partially derived from business confidence. Recently we have seen the numbers in both categories on a downward trend. This trend ends when it is no longer reasonable to decline further and in this case zero bound limit. There was a trend up for all four indicators until around April or May of this year and now it has declined to reasonable levels.
The other index of great importance to the macro view is the employment index of the non-manufacturing sectors. Below is a graph of that index that clearly shows the upward trend we were seeing has ended and is now in a downward trend line. Not only do we have visual confirmation of the shift in the trend line but the R squared statistic has dropped dramatically from its high of nearly 0.75 to under 0.49 last month and from 0.63 the previous month. Statistically both trends have p values of less than one percent, indicating that both trend lines are significant and separate. The trend line is drawn just to show the dramatic shift from the previous trend line.
Pundits of the U.S. economy often point to reports that state businesses have more concern about lack of demand than regulations or just general financial uncertainty. One such prominent pundit is Paul Krugman where he stated the following at the article "The Fatal Distraction."
O.K., I know what the usual suspects will say — namely, that fears of regulation and higher taxes are holding businesses back. But this is just a right-wing fantasy. Multiple surveys have shown that lack of demand — a lack that is being exacerbated by government cutbacks — is the overwhelming problem businesses face, with regulation and taxes barely even in the picture.
For example, when McClatchy Newspapers recently canvassed a random selection of small-business owners to find out what was hurting them, not a single one complained about regulation of his or her industry, and few complained much about taxes. And did I mention that profits after taxes, as a share of national income, are at record levels?
Below is a sample of quotes from respondents in the reports. There is no way to know how widespread these feelings are, but it is reasonable to assume that the ISM picks these quotes to try and capture the general sentiment of their members. The first quote is a damning critique of Krugman's assertions and that is reiterated by the second quote from the issuer of the manufacturing report.
Manufacturing: "The economy continues to be a drag on our business outlook. We are trying to deal with new and additional FDA regulations which are costing significant dollars. It is hard to recoup any of these additional costs in our pricing levels without losing significant sales volumes." (Chemical Products)
Comments from respondents generally reflect concern over the sluggish economy, political and policy uncertainty in Washington, and forecasts of ongoing high unemployment that will continue to put pressure on demand for manufactured products." Bradley J. Holcomb, CPSM, CPSD, chair of the Institute for Supply Management™ Manufacturing Business Survey Committee
"Japan supply chain issues are over, but exchange rates and raw material prices are hurting our profit." (Transportation Equipment)
Non-Manufacturing: Respondents' comments reflect an uncertainty about future business conditions and the direction of the economy. Anthony Nieves, C.P.M., CFPM, chair of the Institute for Supply Management™ Non-Manufacturing Business Survey Committee
"It appears everyone is waiting to see what happens next. No trust in the economy or the federal government to do what is needed." (Accommodation & Food Services)
"The 2012 outlook is not optimistic; though we keep hoping for a rebound, we see little sign of an improved economy — nothing at least that will spur growth, investment or expansion. Improved investment performance in early 2011 caused U.S. to begin several large capital projects, and although we have broken ground, we cannot help but question if our timing was right." (Educational Services)
"Third and fourth quarters appear to be slowing down in order volumes. Uncertainty over U.S. and European economy is causing clients to hold off on new orders." (Professional, Scientific & Technical Services)
This might be the start of the business communities changing attitudes and concerns. That being, that government is clearly the hindrance to business expansion and greater investment levels. And it is hard to think how the OWS movement will increase business confidence and willingness to take on greater risks through expanded investments.