Yesterday’s update on the ISM Non-Manufacturing Index for February reminds that the economy is slowing and perhaps more than expected. The ISM index for the services sector, which represents 80% of the economy, slid to 54.3 from 59. (A reading above 50 indicates expansion). That’s the biggest drop, in percentage terms, since September 2005.
But nothing is simple in the 21st century. Keeping the chattering classes busy, the ISM Manufacturing Index, updated for February last week, posted a rebound last month, rising to 52.3 from 49.3. The jump was significant in that it reversed the below-50 reading set in January. In short, fresh evidence has arrived that manufacturing activity in the U.S. may be poised to tread water if not rise.
The larger point is that coming to hard and fast conclusions remains a risky affair in matters of economic forecasting. That’s always true, of course, and the challenge is elevated at this point in the cycle. Indeed, the ISM Manufacturing Index has twice slipped below 50 in recent months, suggesting that the sector’s outlook is clouded, at best.
Then again, if you’re trading for a living, you must have an opinion now, today, this minute. No wonder then that the rehabilitated doubt about what’s in store for the economy in 2007 has revived hope among fixed-income traders that the Federal Reserve will cut interest rates later this year. The July Fed fund futures contract is now priced in anticipation of a 5% rate, or 25 basis points below the current level.
But lest the fixed-income set become too excited, St. Louis Fed President William Poole on Monday sought to throw cold water on the bond bulls. “To me, and I believe the mainstream forecasters both in government and out — we don’t see a recession on the horizon,” he said via The Herald Tribune/AP.