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.

Former Fed Chairman Alan Greenspan continues to comment on the future these days, and in his latest outing says there’s a one-third chance for a recession this year, according to a report today from Bloomberg News. In a new interview, Greenspan explained: “We are in the sixth year of a recovery; imbalances can emerge as a result. Ten-year recoveries have been part of a much broader global phenomenon. The historically normal business cycle is much shorter” and the abbreviated cycle is likely to prevail again, he noted.
Meanwhile, economist Roger Bootle predicted that the world economy would continue to grow. Bootle, who runs the London consultancy Capital Economics, told attendees at a conference today: “This year and next year growth may be weaker, because of the slow down in the US economy, but the outlook in Europe is good.”
Of course, we could just as easily cite economists who think a recession is coming. The truth is, no one really knows, not even the dismal scientists. As the old joke goes, economists have predicted nine of the last five recessions.
What’s an investor to do? First, stay calm and watch the signals. But above all, be patient. A week’s worth of market action is only slightly more valuable than divining the morrow with a deck of cards. Last week’s correction appears like a big deal only if your perspective starts in February 2007. For those with a longer view, the selling of late is, so far, a small blip, as this long-term chart of the S&P 500 reminds.
Remember, too, that stocks are but one asset class to monitor. The opportunity for strategic rebalancing will come, but it’s not here yet. As such, we continue to overweight cash, a choice that delivers 5%-plus, a yield that we think of as a waiting premium.
Baron von Rothschild famously advised to buy when blood runs in the street. To date, the markets have suffered only a flesh wound. Yes, there are a few spots of blood at our feet, but the selling has yet to offer compelling values for long-term buyers when measured in broad asset-class terms. A larger, more sustained correction is coming, or so we think. Unfortunately, we don’t know when. While we’re waiting, we’re steeling ourselves for the day when the prices look compelling and the crowd is selling. Exploiting that moment will take hefty doses of two items: cash and discipline. We have the former in hand, and we’re hoping to harness the latter at the appropriate time. But for the moment, we’re content to sit and watch.