ISM and Recessions

There has been a considerable amount of debate over the last two days concerning Monday's release of the ISM Manufacturing report for May.  The headline reading came in at 42.8 versus consensus expectations of 42.3.  Within the text of the report, the economists at the Institute for Supply Management stated that a reading in "excess of 41.2 percent, over a period of time, generally indicates an expansion of the overall economy."  As a result, some optimistic investors are beginning to declare that the recession has ended. 

Needless to say, the bearish camp disagrees, as one month does not make a trend, and several indicators have yet to confirm the ISM.  The bears certainly have a point, but some of their arguments are starting to look flimsy.  One argument we recently heard was that the recession is most certainly not over because the ISM is still below the levels it was at when the recession began.  Huh? Say that again?

Before we actually look at prior recessions, let's think about this for a minute.  Since the ISM is a measure of economic activity, it is only natural that the ISM should be higher at the start of a recession, when the economy is at its strongest (peaking), than at the end of the recession when economic activity is at its weakest (bottoming).  In fact, on an logical basis you would think that the ISM would always be lower at the end of the recession than at the beginning. 

Looking at real life recessions shows that this is what does typically happen.  In eight of the prior ten post WWII recessions, the ISM was lower at the end of the recession than at the beginning of the recession.  Going one step forward, the current level of the ISM is actually higher now than the average reading at the end of all post WWII recessions.  Who knows, maybe the bulls have a point. 

  

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Comments

[Artem]

we see positive dynamic in ISM and in buisness activity overall... but we still dont see positive TREND.. so we shorting trucking now for example.. or other b2b services

[Gold IRA]

I recently heard was that the recession is most certainly not over because the ISM is still below the levels it was at when the recession began. here i have an opportunity to get point about ISM and Recessions.
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