The Institute of Supply Management Manufacturing Index (ISM) has been an excellent predictor of recovery from the last four US recessions. Thus given the ISM’s strong recent rebound, many believe that a strong US recovery could be on the way. (ISM in blue, below)
Still, Capital Economics in their latest US Economics Weekly wonders whether this time around we should discount the ISM’s strength as a leading indicator.
The ISM manufacturing index, traditionally the single most reliable barometer of the overall health of the US economy, is pointing to a strong and rapid recovery from recession. At nearly 53, the headline index is now consistent with annual GDP growth of around 3% in the coming quarters and there are good reasons to expect this index to continue climbing. However, we suspect that the ISM will overstate the strength of the rebound.
They point out that the ISM is weighted towards larger manufacturers, who have benefited disproportionately from many factors lately. For example, a recent rebound in global trade stimulated US exports, where larger companies have a greater presence. Also, the credit crunch has been far more severe for small companies. Most large manufacturers can still access credit, while smaller companies are struggling. Finally, Cash for Clunkers may have boosted the size of the ISM rebound, and this program helped larger companies far more than smaller ones.
To back this up, Capital Economics shows us that one measure of small business, the National Federation of Independent Businesses Small Business Optimism index, hasn’t rebounded as strongly as the ISM has. This is despite the fact that it rebounded with the ISM in parallel during previous recessions.
Thus it appears the ISM might not be providing as complete a picture of the US economy as it has in the past. Until we see further improvement on the small business front, perhaps the ISM’s rebound should be partly discounted. Still, we must be careful to point out that Capital Economics still believes the ISM indicates a rebound is happening. It just might not be as strong as you can extrapolate based on the ISM’s past relationship with US recessions.
Beyond this, we personally believe that Chart 3 above says a lot about how large companies have done versus small ones in the current downturn. It’s just another reason to stop worrying so much about saving big business (and big labour), via the tax dollars of their smaller competitors, and focus more on helping those small American companies who might be “too many to fail”.
This is where plain tax cuts would be a far more effective stimulus tool than a complex system of subsidies. You need to be relatively large, generally, to take part in the bureaucratic process of battling for stimulus programs. Yet even the tiniest firm would benefit immediately should America’s corporate tax rate be cut tomorrow. At least we can dream.
(Charts and ISM view via Capital Economics, “US Economics Weekly”, 7 September 2009)