A day after weaker than expected news from the Chicago purchasing managers index and a U.S. consumer confidence survey, the major markets were back on an optimistic footing thanks to the national supply managers' survey, despite the fact that it was also weaker than expected. Why the positive reaction to a report that was arguably negative? Because it wasn't as negative as some feared it might be -- and that says a lot about where the markets are right now vis-à-vis the U.S. economy.
The national Institute for Supply Management survey, a closely watched economic barometer, came in at 53.7 in September, down from the 54.7 mark in August, and well below the 54.8 level most economists were expecting -- a target that had been lowered from earlier estimates. Despite this, the Dow Jones industrial average climbed by close to 200 points by the end of the day, and the Nasdaq market index rose by over 40.
The explanation some market watchers gave for this was that investors were afraid the ISM survey would come in even lower than it did, and so even though it was lower than August it was still seen as a positive result. "It's still a good number, though not quite as strong as we saw last month. It shows the manufacturing sector is still expanding," A.G. Edwards economist Gary Thayer told Reuters. In addition, any reading over the 50 mark still means that the sector is growing rather than shrinking.
And why would some investors be afraid that the ISM might be substantially weaker than even the lowered estimates given by most economists? Because both the Chicago PMI and the consumer confidence survey were so much lower than everyone expected. The Chicago purchasing managers' index (.pdf link), which is a regional version of the ISM report, was particularly worrisome because it fell to 51.2 or barely positive from 58.9.
All the various segments of the Chicago report were down substantially, from the employment index (which fell to 45.3 from 51.2) the new orders index (which dropped to 53.2 from 60.5) and the production index, which slid to 55.8 from 61.6, its lowest level since April. So it's not surprising that some investors were expecting a dismal reaction from the ISM, since the two are often related. Then there was the consumer data.
The Conference Board's consumer confidence index fell to 76.8 from 81.7 in August, well below the 80.6 consensus forecast and its worst reading since March. The "expectations" sub-index dropped to 88.4 from 94.9, and the present conditions index fell to 59.5, the lowest level since 1993. "It definitely gives a stark look at how consumers feel today and that they are not optimistic about the next few months," Mat Johnson of Quantit Economic Group told Investor's Business Daily. "The obvious inference from this is that people are feeling more dire about the job market."
As Merrill Lynch chief economist David Rosenberg pointed out in a research report, the current conditions portion of the survey fell for the fifth month in a row, and is well below the recession trough reached in November, 2001. "We can't find a time historically when the current conditions index was so far below the recession low this far into an economic recovery," he said. The spending intentions portion showed that the number of people with plans to buy a new car was at its lowest level since 1974 and the number planning to buy a new home was lower than at any time since 2000.
While the ISM index may have been better than the "whisper" number, it didn't have great news for job-seekers. Although the new orders index was strong, the employment sub-index dropped again in September to 45.7 from 45.9 in August -- the 36th month in a row where the employment picture has been shrinking rather than growing. "We're getting modest growth in the manufacturing sector, but not enough to generate job growth yet," AG Edwards chief economist Gary Thayer told Reuters.
Inventories were also weak, at 42.7, showing that stockpiling of supplies shrank for the 44th straight month. In other words, while orders may be coming in faster, manufacturers are still unwilling to either build up inventories or to hire more workers. Until those things start to happen, economists say, the economy will continue to operate on only one or two cylinders -- consumer activity, for example -- rather than using them all.
The major market indexes, however, seem to have already built in the assumption that the U.S. economy will be roaring along very soon. Although the Dow has fallen back by about 2.5 per cent from its recent high of 9,659 on Sept. 18 -- and the Nasdaq and S&P 500 indexes have also slid somewhat from their peaks last month -- they are still up substantially over the past six months, as evidence seems to be mounting that a recovery (however mild) is under way. The Dow and the S&P are up by more than 15 per cent and the Nasdaq has climbed by more than 30 per cent.
The main thing the markets are hoping for is stronger third-quarter earnings, and investors will start to get a sense of what those might look like over the next week or two. But the broader context to those earnings is the economy -- and that is a fairly mixed bag at the moment. If the markets hopes have been overplayed, things could get bumpy.
E-mail Mathew Ingram at mingram@globeandmail.ca
For past columns and a brief biography, click here
Look for exclusive commentary by Mathew Ingram at GlobeInvestorGold
© The Globe and Mail
Only GlobeinvestorGOLD combines the strength of powerful investing tools with the insight of The Globe and Mail.
Discover a wealth of investment information and and exclusive features.
