August ISM = 50.6

On the first business day of each month, the ISM Manufacturing number comes out. This is the report that has been freaking people out recently.

Let me explain: The break-even point for the ISM is 50. Any number above that indicates a growing economy; anything below 50 indicates a shrinking one.

The ISM for April was 60.4 which is very high. That dropped to 53.5 for May. In June, it bumped up to 55.3. Then in July, the ISM dropped to 50.9.

So there you have it: a clear downward trend to recession. Well, not exactly. Some folks were expecting today’s ISM report for August to continue the trend and hit the mid-40s. Instead, it seems to have stalled just above 50, which is perfectly fine.

Historically, the odds of a recession shoot up when the ISM is below 45 and we’re still way above that. I ran the numbers and found that the ISM printed between 50.0 and 51.0 forty-nine times, and only three of those were official NBER recessions. In other words, there’s still no solid proof that a Double Dip is on the way. It may happen, but the numbers don’t yet show it.

I keep harping on the “Fear Trade” but this is exactly what’s driving the markets. Notice that stocks turned higher when the ISM came out. So we rallied, not on good news, but simply because the bad news failed to show up. That tells you how fearful traders are.

For now, it’s not so much that stocks are going up and bonds are going down, but they’re walking back the ground they unreasonably took over the last several weeks. This should continue.

Posted by on September 1st, 2011 at 10:28 am


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