ISM Manufacturing Index Confirms Factory Sector Recovery is Underway
The ISM Manufacturing Index rose 4.0 points to 52.9, the first reading of the composite index that exceeds 50.0 since January of 2008. Index readings exceeding 50.0 denote an expansion of factory activity. Indexes tracking production and new order scaled new heights (see table 1). The main message is that the factory sector has turned the corner and is well on the way to a phase of expansion in activity. The exports orders index also advanced in August, while the import orders index fell. The index measuring employment rose but remains below the level denoting an expansion of payrolls.
Historically, the ISM manufacturing index has crossed the critical mark of 50 after the end of a recession (see chart 1). The latest reading now supports forecasts of a trough in the second quarter and an increase in real GDP in the third quarter.
Housing Sector Update
The Pending Home Sales Index (PHSI) of the National Association of Realtors increased to 97.6 in July from 94.6 in June. According to the National Association of Realtors, the PHSI leads actual sales of existing homes by one-to-months. PHSI has risen for six straight months. The latest PHSI data suggest that sales of existing homes most likely advanced in August, following four consecutive monthly gains.
Non-residential construction spending declined 1.2% in August, marking the fourth straight monthly drop. The non-residential sector lags the business cycle, which implies that additional weakness in this sector should not be surprising.
“Cash for Clunkers” Program Accounts for Jump in Auto Sales during August
Auto sales rose to a 14.09 million annual rate in August from an 11.24 million sales pace in July, reflecting the impact of the “Cash for Clunkers” program. The increase in car sales in the July-August period is a big plus for consumer spending in the third quarter and should raise headline real GDP. A pullback is most likely in the September-October period, along with a smaller gain in consumer spending in the fourth quarter compared with the third quarter’s projected 2.0% annualized increase. Dealers supposedly ran down inventories in August such that an abrupt drop in sales in September is being envisioned for popular models.
