Recessionary Signals from Manufacturing?
The big news on Monday was that the ISM Manufacturing index read "Contraction" for the first time since July 2009. Yet US stocks still ended in positive territory.
Let's put it this way. If investors truly thought a recession was on the way, then stocks would have been severely in the red. Here is the myriad of reasons why this reading was so easily dismissed.
- Soft Patch Theory: Last year we had a whole series of readings not that far from the 49.7 reading of Monday. So not hard to assume this is another soft patch that is followed by a reacceleration of growth.
- Europe & China: The export component clearly shows that slowing demand from Europe and China was behind this poor result. However, that is old news. With a greater likelihood of growth oriented initiatives in Europe (versus austerity only), there could soon be a reversal of some of these negative trends. Plus China is likely to open up the spigot on more stimulus if things slow any further.
- Greater Likelihood of Fed Action: If the economy truly got worse, then the Fed would likely get even more accommodative.
- Construction Spending: Also on Monday we received a great positive surprise in this vital aspect of the economy. Construction spending for the month grew +0.9% versus 0.2% consensus. Plus last month was revised up from 0.3% to 0.6%. Nothing could be better for the economy than for this sector to get on track.
- Gas Prices: Lower prices at the pump is like a tax break that allows people to spend more money on all other items. This has traditionally been very positive for the economy.
The above gives plenty of reasons to shrug off this ISM Manufacturing report. However, if more US economic data keeps coming in on the light side, then investors will have to take notice resulting in another pullback.
By the way, there will be no Profit from the Pros email on Wednesday in recognition of the July 4th Holiday. Enjoy the break. We'll pick up the conversation on Thursday.
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