Monday, September 21, 2009

Purchasing Managers Index - More Impetus For This Rally

Since March, every time the markets rallied, you get a growing chorus of naysayers calling it a bear market rally. Why bear market rally - it implies that it is temporary, shortlived, ... and usually those who called that were cashed up or failed to go long. We are in the 5th or 6th month of a 'bear market rally', I think its time people just stop calling it that. Its a recovery rally. A bear market rally implies things in the real world may get a lot worse. Actually, the worst is already behind us, and that in itself is a big statement. While I think the worst is behind us, it does not mean all is rosy. We have turned a corner but there are still a lot of people unemployed, even if you find employment it may not be at the same pay as before. Then there is the constructive employment which is people staying in their jobs even amidst pay cuts or no raise for the past 12 months. The markets are not hot enough for people to jump ship or trade their jobs for another position. That in mind, people are not spending big, generally. However you see plenty of invetsors willing to plow into new properties, mainly for investments in Asia. That has more to do with the very low interest rates which many are attempting to lock in the low rates and hoping to flip for the 10%-20%. Cannot blame them.

Back to a bear market rally, it is good to keep hearing it because that means its not frothy as many are still sidelined. I think we are ok till year end and even 1Q2010 before we get a significant pullback, even then its will be in the region of 10% and not the hazardous 20%-30% type of correction. Below was a significant piece in piecing together the substantiveness of a recovery in the US. The purchasing managers index is a very important leading indicator and that is headed the right way.

At the beginning of each month, the focus of attention of most economists in the United States is the non-farm payroll report. However, for those looking to see whether the economy has turned around, last week's reports on purchasing managers' surveys may have provided the more significant data.

The non-farm payroll report from the Labor Department showed that employment continued to decline in August. Non-farm payroll employment fell by 216,000 while the unemployment rate rose to 9.7 percent from 9.4 percent in July.

Despite the continuing decline in employment, the rate of contraction has moderated. Employment had fallen by 276,000 in July and 463,000 in June.

Still, if you are looking for indications that the US economy has stopped contracting, the employment report is providing little of it.

Rather, clearer indications that the economy has turned around came last week from the Institute for Supply Manufacturing. Its survey of purchasing managers in manufacturing generated a PMI of 52.9 in August, up from 48.9 in July. This marks a return to expansion for the manufacturing sector.

Perhaps even more impressively, the new orders index jumped to 64.9 in August, the highest level since December 2004, from 55.3 in July, thus marking a second month of expansion.

The August survey of purchasing managers in the non-manufacturing sector produced a less optimistic picture. The non-manufacturing index came in at 48.4, below 50 and thus suggesting continued contraction, although it was an improvement over the July reading of 46.4.

However, some sub-indices for non-manufacturing are showing that the contraction may already be coming to an end. The business activity index jumped to 51.3 in August from 46.1 in July. The new orders index rose to 49.9 from 48.1.

The ISM purchasing managers' indices had been somewhat timely in signalling a turn in the cycle at the start of the recession. Back in December 2007, both the manufacturing PMI and new orders indices had fallen below 50 simultaneously for the first time in the cycle while both the non-manufacturing business activity and new orders indices were above 50 for the last time in the cycle. December 2007 turned out to be the peak of the cycle.

So the recent improvements in the ISM indices certainly bode well for the economy. They are probably among the indicators providing the clearest signals yet that the recession in the US has ended.

p/s photo: Noryn Aziz


solomon said...

I think you got to present to the readers of the potential downfall in this October.

The low interest rate may present to the ernest opportunities for mass borrowing of Sterling Pound / USD and investment in high yield currencies. The unwinding of it in this coming October will endanger the financial system.

I still finding a difficult appreciation why the increase in ISM does not come together with a better employment rate, with a stagnant productivity rate.

jeremy tan said...

Hi Dali, need your advice, a lot of people are saying the economy is recovering and the recession has ended. Nevertheless, the job losses are still increasing.
Bloomberg reports today:
However, U.S. stocks fell, pulling the Dow Jones Industrial Average down from an 11-month high, on speculation a six-month rally has outpaced prospects for profit growth. European and Asian shares also dropped as the dollar and Treasuries gained, while oil, copper and gold retreated.
there’s a large crowd expecting a pullback after such a strong spike. People are saying that the market is vulnerable now and we’ve gotten beyond the idea that the economy is less bad. People want to see evidence of whether companies can actually start to grow.

Is this the right time to buy equity?

Your insights on this matter would be much appreciated.

Thank you.