Will Manufacturing’s November Revival Last?

Yesterday’s update on the ISM Manufacturing Index offers another encouraging data point that builds on the acceleration in jobs creation via ADP’s November employment report. If it wasn’t for ongoing euro crisis and the potential for instability in the budget negotiations in Washington, optimism would be a no-brainer. But we live in interesting times, and so expectations must be managed carefully.


The ISM Manufacturing’s pop last month comes at a time when the labor market seems to be strengthening, albeit from dangerously low levels of growth. Ditto for the latest ISM number, which jumped to 52.7 in November, up from 50.8 in October. Readings above 50 indicate growth and so it’s helpful that we’ve put some distance between the dividing line of expansion and contraction. Of course, the fact that we’ve been flirting with the 50 mark in recent months is a reminder that the macro trend is still precarious.

A change in the ISM trend has been an early clue of things to come in the past. That was true in the first half of 2011, when the ISM Index posted a sharp decline in May. That was a signal of the approaching summer slump and all the trouble for macro we’ve witnessed ever since. Shortly after ISM’s spring tumble, the year-over-year change in the stock market turned lower as well.
Now we have what appears to be a reversal, as the chart above shows. The ISM Index turned up in November and the S&P 500’s annual pace is slightly higher too. That’s a good sign if you consider that annual declines in equity prices tend to accompany recessions.
In short, we’ve pulled away from the brink. But there’s the uncertainty that comes with the troubles in the eurozone. The potential for a breakup of the euro looms. It may not be fate, but the risks are higher today than just a few months ago. One reason is that we’re hearing mixed messages from the Continent’s leaders. Mario Draghi, the European Central Bank president, says he’s prepared to take more forceful steps to manage the crisis, but German chancellor Angela Merkel is effectively warning that the ECB will not provide the lender-of-last-resort medicine that’s needed.
Yes, there’s some bubbly economic reports of late, and today’s jobs report from the Labor Department looks set to add to the good news. Even auto sales are rebounding. But the uncertainty tied to the euro keeps us wondering if there’s another Lucy waiting to pull the football away from Charlie Brown once again.

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