Media in Near-Panic over Two Less Than Perfect Economic Reports

December 1st, 2006 5:13 PM

NOTE: Skip to the last paragraph to get the media bias-related conclusion/speculation.


The Institute for Supply Management's November report tells us that manufacturing's winning streak is over:

Economic activity in the manufacturing sector failed to grow in November for the first time following 41 consecutive months of growth, while the overall economy grew for the 61st consecutive month, say the nation's supply executives in the latest Manufacturing ISM Report On Business®.

As I have noted periodically (here, here, and here, among others), the 41-month expansion streak we were in the midst of is one of the longest ever, and enters the record books with other expansions as follows (link is to ISM history going all the way back to 1948; parenthetical values are for the month following the end of each streak, the lowest value it went to during the subsequent contraction, and the number of months it took for the value to get back to 50.0 or higher):

-- October 1962 - December 1966: 51 months (49.1, 42.8, 8)
-- August 1975 - July 1979: 48 months (49.5, 44.8, 7)
-- February 1971 - August 1974: 43 months (46.2, 30.7, 12)
-- June 2003 - October 2006: 41 months (49.5, NA, NA)
-- August 1986 - April 1989: 33 months (49.3, 45.1, 12)

If you want a silver lining, the November reading ties with 1975-1979 expansion for the highest-value streak-breaker.

In retrospect, considering the awful situation with the Big Three in Detroit and the dropoff in housing sector activity, it's amazing that the streak lasted as long as it did. The length of the streak is probably a testament to the underlying strength of the rest of the manufacturing sector. If that assessment is correct, considering that both of the laggards (autos and housing) may have bottomed out, I would not be surprised if the ISM reading drops very little beyond where it has gone, and stays below 50 for a much shorter time period than after the previous lengthy expansions.


So much for my view.

It seems from press reports that I must have no idea what I'm talking about, because the world as we know it seems to be coming to an end:

From AP:

In a report that points to a worrisome trend for the economy and for jobs, ISM said its manufacturing index registered 49.5 in November, behind October's reading of 51.2. The last time the sector contracted was in April 2003. A reading below 50 indicates contraction.

The sector had been growing for 41 consecutive months.

November's index came in below the average analyst expectation for a reading of 52.

The index was one of two troublesome economic reports Friday. The Commerce Department said construction activity in October plummeted by the largest amount since 2001, and home building fell for the seventh month in a row.

Both reports raised concerns that the economy may be in for a hard landing.

The report waits until the last para to tell us:

While the overall manufacturing sector contracted, eight industries reported growth in November. They included apparel and leather; plastics and rubber; primary metals; food, beverage and tobacco; computer and electronic products; printing; chemical products and the miscellaneous category.

But the ISM's report covers 18 industries. The other 10 are:
-- Textile Mills;
-- Wood Products;
-- Paper Products;
-- Petroleum & Coal Products (NOTE: this one came in "neutral," per ISM);
-- Nonmetallic Mineral Products;
-- Fabricated Metal Products;
-- Machinery;
-- Electrical Equipment, Appliances & Components;
-- Transportation Equipment;
-- Furniture & Related Products;

So, almost half of manufacturing (8 sectors of 18) is still in expansion mode, one sector is neutral, and 9 are contracting. Additionally, based on info provided to me by ISM, the expanding sectors make up 53.3% of the manufacturing GDP, while the contracting sectors make up 46.7% (splitting the neutral sector 50-50). This is how you get to a reading that is almost neutral (49.5). That actual situation makes the "hard landing" reference above, and the following comment from a different AP report, seem pretty absurd:

"This is just additional confirmation that the economy is not only slowing but quite possibly going into a recession," said Hugh Moore, a partner with investment firm Guerite Advisors. "It's not just the housing and auto industry any longer, now we're finding out that manufacturing in general is slowing."

Moore said an ISM number below 50 has preceded every U.S. recession since the 1960s.

Oh, for cryin' out loud, Hugh, the number has been below 50 during a lot of NON-recessionary periods too.

As to that construction spending report (link is to a third AP article), a closer look reveals that the weakness is still confined to residential housing. Government-related construction increased 0.8% during the month (about 10% annualized), and "non-residential building was still 16.4 percent above the level of a year ago."

Those who believe that there is a comprehensive political meme behind the reporting may sense that the economy is being set up to look bad, so that the new Congress can "come to the rescue" when it takes control in January. I'm not ready to contend that just yet, especially because it seems that the Christmas shopping season is on its way to strong results, but be on the lookout.

Cross-posted, with expanded commentary, at