The Wilder View

This is why the ISM is an Important Indicator

Today’s ISM number is just another clue that the recession is ending. From MarketWatch:

Conditions for the nation’s manufacturers continued to get better in July, the Institute for Supply Management reported Monday. The ISM index rose to 48.9% in July from 44.8% in June. The July index is the strongest since September. The consensus forecast of estimates collected by MarketWatch was for the index to rise to 46.2%. Readings below 50 indicate contraction. Below the headline, the report was strong. The data is showing that the manufacturing downturn is coming to an end. Both production and new orders rose above 50%. The ISM index has been improving slowly since hitting a low of 32.9% in December. The index was last above 50% in January 2008.

Readings below 50 indicate that manufacturing is contracting, while the Institute for Supply Management states that the recession is ending, too:

“A PMI in excess of 41.2 percent, over a period of time, generally indicates an expansion of the overall economy.”

The ISM has a fairly strong autoregressive process, or its trend is statistically robust. The ISM pmi has been above 41.2 percent for three months now, May through July – a trend that will likely continue. This serves as further evidence that positive GDP growth will resume in Q3 2009 because the ISM is a decent proxy of monthly GDP growth.

ism_gdp_chart.PNGThe chart illustrates the quarterly ISM index and GDP growth spanning the years 1975-2009. The R^2 is respectable, however, I’d say that’s pretty strong for GDP growth; and notice how most of the positive GDP growth rates correspond to an ISM index greater than the revered 41.2 percent.

Just a little more evidence that the recession is finally ending.

Originally published at News N Economics and reproduced here with the author’s permission.

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