Earlier this month (12/01/2015), the US ISM Manufacturing Purchasing Managers Index (a mouthful but each word is necessary) disappointed. It was released at 48.6 (the Bloomberg Economist’s survey was for 50.5). We want to take a minute to explain why this is important, because as with any negative economic news released, it has been roundly dismissed by the optimistic Wall Street group.
In the ISM’s case, the popular refrain is that manufacturing makes up such a small portion of the US economy (the service sector is much larger) that it shouldn’t be worried about. But, we counter that the power of this series has never been in describing the whole economy, it has been in the much more valuable position of forecasting where the whole economy is going.
[5]
This series stretches back 1948, and as you will see below, it has a great record of correlating to economic output, but with a 4 month lead time.
[6]
If markets stay as calm as they are, we have to concede, that yes, the Fed will raise rates by 0.25% next week on December 16th. The Fed raising a second time, however; we think is unlikely.
Our thesis continues to be that no matter what the Fed does, disinflation reigns with an output gap, and the yield curve will bullishly flatten. The Fed raising rates just hastens this process.
