American Manufacturing Making A Mockery Out of sceptics

Amongst all the European gloom, and continuing high U.S. unemployment, U.S. manufacturing is making one of the most robust come backs in the world right now. Noah Weisberg @ Goldman: And within that global cyclical recovery, it may come as a surprise to many that the US is not obviously lagging – what Exhibit 3 shows is that the US manufacturing ISM index level is now among the highest across the world, higher than Europe, but also higher than BRICs. In other words, at least for the time- being the US manufacturing recovery is among the paciest, and the most recent round of quarterly earnings results also seemed to support this with both domestically and globally exposed companies reporting solid results.

The U.S. ISM is shown by the thin purple line below, which has risen higher than even the BRICs (the dotted black line).
[image url="" link="lightbox" caption="" source="" alt="Chart" align="left" size="xlarge" nocrop="true" clear="true"]
Hate to deliver good news, but last week, the U.S. ISM manufacturing index blew away expectations and generally killed it.

While high U.S. unemployment remains a pressing problem, investors need to differentiate between leading and lagging economic indicators. Yes, there are a lot of economic data sets out there with dubious predictive value, but the ISM manufacturing index is one of best regarded and most reliable leading indicators for the U.S. economy. Employment, meanwhile, is a lagging indicator — it improves way after everything else does. (Which is of course unfortunate for those who are unemployed, who must wait).

Thus scepticism towards the current U.S. economic rebound is fine and healthy, but sceptics need to explain why the ISM might have been inflated in the short-term (Cash for Clunkers perhaps?) rather than to continuing harping on about the unemployment data. (which actually appears to have started to improve as well, even) Why is U.S. manufacturing rebounding so robustly and is it sustainable? Answer that question solidly and you’ll predict the course of the U.S. and global economy.

For more analysis like this, add my twitter: @vincefernando

(Chart and excerpt via Goldman Sachs, ‘Tradewinds: Global equities caught in macro cross-currents’, Noah Weisberger, 9 Feb 2010)

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