Goldman: The ISM Manufacturing Index Will Collapse By 2011

The ISM Index of U.S. manufacturing could collapse from its current 56.3 level to below 50, says Goldman Sachs. This would imply that manufacturing activity could contract, since any reading below 50 signifies shrinking output.

Goldman’s Andrew Tilton:

The vigorous rebound in industrial activity that began in mid-2009 has begun to fade in recent months. This is already quite evident in the growth rate of industrial production, and to a lesser extent in the decline of the ISM manufacturing index from its peak in April.

We expect the ISM index to decline to 50 or below by early 2011. A significantly weaker ISM manufacturing index would be more consistent with a) the detail of the ISM report, specifically the small gap between the new orders and inventories indexes, b) the weighted average of regional factory surveys, c) the current rate of inventory growth, which has stabilised the manufacturing I/S ratio, d) the typical behaviour of the ISM index after large inventory cycles such as the one we have just experienced, e) the recent sub-1% pace of final demand growth.

Note this is more than your run-of-the-mill growth slow-down double dip forecasts. We’ve heard a lot of those lately, and most are mis-using the term ‘double dip’ to mean any kind of deceleration. Here, rather, Goldman forecasting a real double dip, ie. a contraction of economic activity, for manufacturing. (Though not for overall American GDP, which they still expect to grow)

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(Via Goldman Sachs, U.S. Daily, 16 September 2010)

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