The ISM Manufacturing Survey is probably the most important non-governmental economic data release.The ISM PMI enjoys a reasonably strong relationship with GDP. A simple linear model demonstrates a leading relationship between the two series:
The model implies annual GDP growth around 6%. This is interesting, because it also confirms that the private economy is humming along at a pace of between 4-6%, as evidenced by data like Personal Consumption Expenditures (just shy of 5% y/y) and Private GDP (5.5% y/y last quarter).Clearly, the broader economy is not doing this, and this is principally from the evaporation in government spending. This suggests that a debt ceiling deal that can at the very least normalize government spending could buoy 2H GDP for an annualised pace around 5%. The Imports Index has two tells: one is for GDP (imports are subtracted from GDP), and the other is for the dollar. As we explored in our previous piece on the topic, the trade balance is a strong factor in the pricing of US dollars. One of my favourite series in this release is the Employment Index, which has historically maintained a very strong relationship with payroll growth. It is implying a much rate of growth — something closer to 400k m/m — which is clearly isn’t happening. However, in conjunction with income tax withholding data showing stronger growth than the BLS payroll survey suggests, it is conceivable that we could quickly start moving to 200k non-farm payroll reading for most of the 2nd half of 2011. I have heard several times that the ISM “internals” are weak, generally referring to backlog declines. This is inadequate analysis. We have written about the subject before. It is absurd to think that it is normal or desirable to have ever-growing backlogs — and we have had backlog growth nearly every month for the past 30 months. This is indicative that we must re-configure output to suit demand. Backlogs being worked off are a function of this output reconfiguration success. That they are coming down is also likely indicative of payroll growth indicators gaining strength over the next few months, commensurate to the relationship between backlogs, capacity utilisation & underemployment.