And you thought the economy was headed for a double dip.
On Friday, the Institute for Supply Management (ISM) reported that its gauge of manufacturing activity rose in June to 55.3. That was slightly higher than economists expected. Stocks shot up on the news, capping off a week where the Dow Jones industrial average is up about 5%. A similar measure that tracks manufacturing in just Chicago was up as well. The question: Was this number really good or is this just another sign that our expectations for this recovery have gotten too low?
A year ago that reading on the ISM would have been either ignored or met with disappointment. What’s more, 50 is essentially the break even point on the index. Below 50 and you are in contraction. Above 50 and the manufacturing sector is adding jobs. 55 is not that much higher than the breaking point. It’s not a great number. What’s more, we have known for a while that manufacturing was the one sector that was weathering the economy better than others. And it is also the sector that was probably the most affected by Japan’s tsunami related slowdown. So if anything was going to bounce back manufacturing was it. But the reality of this recovery has been that manufacturing, along with farming and mining – two other sectors that are also seeing quick recoveries – are not really big enough anymore to drive the entire economy out of recession. We need sustained hiring in the business and professional services sector. And we haven’t had that yet. Also, economic data is always choppy at turning points. All the data recently has been pretty bad. But even if we are headed for a double dip you may still get one or two pieces of economic data that look relatively good.
(Special: Jobs: Some Light at the End of the Tunnel)
Still, right now at a time when the expectations for the economy recovery seem are low or even non-existent, the ISM number was met with great cheer. It does appear that we have hit a point where the bar perhaps has gotten too low. A number of forecasting firms have dramatically cut back their estimates for second quarter growth. Ben Bernanke believes the economy will rebound in the second half, but even that was starting to seem like a long shot. The ISM number today means that this talk that the current downturn is just a slow patch may actually be a possibility. So, for now, enjoy some good economic news for the holiday weekend. Happy July 4th.