Courtesy of Lee Adler of the Wall Street Examiner
ISM New Orders Index Not Seasonally Adjusted
The ISM not seasonally adjusted (NSA-in other words, actual) new orders index had been diverging from the stock market as the growth rate of the US manufacturing sector slowed. This has happened in the past over long periods of time, including 2004 to 2007.
After a weak reading in August, the index rebounded in September to a reading of 53.6, which was above the September 2011 reading of 52.4. That suggests that the trend of weakening under way since the initial bungee rebound from the recession, may have at least stabilized.
Meanwhile the September headline seasonally adjusted aggregate Purchasing Managers Index beat consensus expectations handily. The beat was consistent with the tipoff that we got from the real time federal tax data showing strength in September, which started early in the month and continued throughout.
September has usually been a down month in the NSA New Orders Index. The average month to month decline over the previous 10 years was -1.4. Last year the September reading was down by 0.6. In that context this year’s gain of 5.4 from the August reading was stunning.
The manufacturing sector represents about 11% of the economy. The services sector data representing the bulk of the US economy, normally released a few days after the manufacturing data, typically lags the manufacturing index by a month or two. The ISM manufacturing new orders index therefore appears to be a good leading economic indicator but in terms of its bigger year to year trends, it is not very useful as a stock market indicator.
This index trended lower from 2004 to 2007, while stock prices continued to rise. That was a potential hint that the stock market may have been in a bubble beginning in 2005, since it kept rising while ISM’s new orders were slowing. The new orders index briefly went negative in early 2007, but then recovered until October, which is about when the Fed pulled the plug on the System Open Market Account (see below). The index next went negative in January 2008, by which time the market was down for the count.
The recent slide reached 45.2 in June. That was the same level the index had reached in March 2007, 7 months before that bull market ended. While the index is back above 50, it remains in a downtrend. It’s impossible to say how long a lead time the indicator may have, if any, before the next bear market.
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