ISM Survey Being Driven By Inventory Restocking Cycle
Lance Roberts | Dec 06, 2013 02:11AM ET
Lately, there has been a significant uptick in the ISM Manufacturing Survey's that have raised hopes that economic growth will finally, after three years of disappointment, begin to accelerate. David Rosenberg just recently wrote in his daily missive that:
"The U.S. is in clear expansionary mode."
However, before we get too terribly excited it is important to remember a couple of things. First, the ISM survey is a sentiment survey of how manufacturers currently "feel" about their business. If they are very busy producing products, then it is not surprising that sentiment would increase.
As I discussed recently in "I discussed recently, the weakness in consumer spending and incomes bodes poorly for the upcoming holiday season.
This brings us back to the ISM Manufacturing Survey. In general, survey's such as the ISM, are more of a coincident rather than a leading indicator. When business is brisk, business owners tend to extrapolate the current environment into the future. However, sentiment, as shown in the chart below, can turn negative very quickly. Not surprisingly, there is a historically high correlation between the ISM Manufacturing Survey and the net contribution of the change in private inventories to the economy.
The potential issue with consumer spending on the decline, is that the buildup in inventories will likely begin to weigh on manufacturers sentiment. However, as shown in the chart above, it would not be unusual to see a sharp decline in sentiment in the coming months given the current detachment of manufacturers outlooks from the underlying economic fundamentals.
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