Just when it seemed clear that the economy was settling into a big-time slowdown, along comes the ISM report with surprisingly good news. The ISM report captures manufacturing activity, and the fact that it was up–economists had expected a decline– sent Wednesday’s stock market on a tear (it helped too that China also reported upbeat manufacturing news.) By late morning the Dow Jones Industrials were up by 250 points.
Even amid the joy, however, analysts were quick to note that the news wasn’t all worth celebrating. Here’s a taste of the doubt as expressed on Economy.com’s Dismal Scientist:
The modest gain bucked expectations for the index to fall into the low 50s and suggests that manufacturing conditions held up much better than anticipated in August. Some of the leading indicators remain worrisome; new orders fell from 53.5 to 53.1, while inventories rose by 1.2 points to 51.4. The gap between new export and import orders suggests trade will provide little support, if any, to growth this quarter.
A separate bit of weakness came in the ADP employment report, which measures private sector employment. It showed a net drop of 10,000 jobs.
As the data unfold, the financial markets may be applauding but the economists are sharpening their pencils—and lowering their forecasts. This morning BofA Merrill Lynch’s economic team lowered its forecast substantially, declaring the onset of a growth recession. Here’s how Merrill economists Ethan Harris and Michelle Meyer put it:
After salami-slicing our forecast in recent months, we are ready to make a deeper cut. We now expect a growth recession: we think the economy will manage to post positive headline GDP numbers, but this growth will not be fast enough to keep the unemployment rate from drifting higher. We expect below-trend GDP growth in each of the next four quarters, and with a gradual rise in the unemployment rate above 10%.
Merrill’s forecast for 2011 growth is now a weak 1.8%. I guess that’s enough to power a big stock market rally, especially if the market had been worried about an outright double dip recession. But once that sigh of relief rally is over, how far can measly economic growth really carry stocks?