Take the ISM Index With a Grain of Salt

By iamned - Last updated: Monday, May 11, 2009 - Save & Share - Leave a Comment

Is the ISM manufacturing index a reliable economic indicator? Maybe not.


The ISM manufacturing index dipped periodically below 50 in 2003-2007 signaling contraction, but the stock market nearly doubled in that period. That’s because manufacturing isn’t important because the United States is no longer a manufacturing nation due to the thriving export based service and intellectual property sectors. Such companies that are prospering in this transitional phase include Apple, Google, Mastercard, Potash, WallMart, McDonalds; leaders of the last bull market.

In 2004 the ISM index plunged from 62 to 52, but the stock market still had a positive year and there was no recession. It dipped below 50 by the end of 2006, but the S&P 500 gained fifteen percent year over year, anyway. The economy, meanwhile, grew at a blistering pace thanks to exports, plunging personal savings rate, and robust consumer spending.

This is why welfare liberals and protectionist libertarians who rely on sociology and demographics for their investment decisions will loose money by shorting into bull markets. Or they will substantially underperform the market by sticking their money in some sort of dollar denominated ’safe haven’. They interpret the loss of manufacturing jobs as being indicative of economic weakness when, in fact, it isn’t.

Although the recent gains in the ISM index is evidence that the recession ended in March/April, it isn’t a reliable indicator for measuring overall economic health.


Can we stop dwelling on job loss? On chat broads and blogs we keep hearing about unemployment such. Those jobs being lost aren’t important. The recession can end long before the jobs start coming back, and high employment results in inflation and stagnant technological progress, anyway.

Even if the government is lying and the real unemployment rate were 18% wouldn’t it already be reflected in the stock market? You think the huge funds that move the market rely on government released statistics? No, because they have their own proprietary data gathering models.

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