Better ISM Tempers (Just Barely) Recessionary Condition Risks

Now I have say, the latest Purchasing Managers' Index (PMI) report, released Friday by the Institute of Supply Management, was largely positive and to some extent tempers the risks of recessionary conditions that I have been commenting on in recent posts. (Note- I have not and will not say we are or not in or entering a recession. My analysis is based on historical observations and using these observations to assess the current climate.) The February PMI reading of 54.2 was more than point better than January's results and still above the 50 demarcation indicating growth. The bump up in the PMI came on strong reading in both production rates (57.6) and new orders (57.8). The positive move in the new orders index was confirmed from a tick down in the customer inventories index, down to a near average figure of 46.5.

MANUFACTURING AT A GLANCE FEBRUARY 2013
Index	Series Index Feb	Series Index Jan	Percentage Point Change	Direction	Rate of Change	Trend* (Months)
PMI™	54.2	53.1	+1.1	Growing	Faster	3
New Orders	57.8	53.3	+4.5	Growing	Faster	2
Production	57.6	53.6	+4.0	Growing	Faster	6
Employment	52.6	54.0	-1.4	Growing	Slower	41
Supplier Deliveries	51.4	53.6	-2.2	Slowing	Slower	4
Inventories	51.5	51.0	+0.5	Growing	Faster	2
Customers' Inventories	46.5	48.5	-2.0	Too Low	Faster	15
Prices	61.5	56.5	+5.0	Increasing	Faster	7
Backlog of Orders	55.0	47.5	+7.5	Growing	From Contracting	1
Exports	53.5	50.5	+3.0	Growing	Faster	3
Imports	54.0	50.0	+4.0	Growing	From Unchanged	1
OVERALL ECONOMY				Growing	Faster	45
Manufacturing Sector				Growing	Faster	3

The question is, does the latest PMI indicate a lessening of recessionary risks. The historical results suggest yes, but just barely. I have noted that GDP tends to contract in the quarters following either stall speed, year-over-year GDP growth (i.e. in or around 1.5%) or a negative acceleration in total employment, both of which we are seeing now. When you combine either condition with a PMI of 54 or greater, the bias for significantly below trend GDP remains in place, but the median percentage change in GDP is better by about 30 basis points versus either condition by itselve. As for the batting average, GDP has declined in the range of 50% to 70% of the quarters following periods with stall speed GDP, downward moves in total employment, and a PMI greater than 54. This compares to GDP gaining in nearly 88% of all observable  quarters.

It is my opinion that investors should remember that manufacturing is usually a late cycle play, meaning that results for these firms tend to increase late in business cycle. This is what the latest PMI could be reflecting, especially in regards to other evidence suggesting the risks of recessionary conditions are elevated. One final note on the PMI, the global PMI, excluding the US decline in the latest month and fell below the 50 demarcation indicating growth. The chart below shows the US PMI versus the global PMI, output, and new orders figures.


Although the history of the global PMI is short, a quick look of the chart suggests any directional divergences in the US and global PMI's tend to be mean reverting.