Tuesday, July 03, 2012

Manufacturing vs. Housing

by Bill McBride on 7/03/2012 01:28:00 PM

Note on Auto Sales: I should have an estimate for the June Seasonally Adjusted Annual Rate (SAAR) around 4 PM ET.

A note on manufacturing vs. housing: The ISM manufacturing index dropped below 50 for the first time since July 2009 (below 50 indicates contraction). And the JPMorgan Global Manufacturing PMI also fell below 50.

Meanwhile, in the US, housing is picking up. Housing starts have been increasing, residential construction spending is up 17% from the recent low, and new home sales have averaged 353 thousand on an annual rate basis over the first 5 months of 2012, after averaging under 300 thousand for the previous 18 months.

If someone looked at just manufacturing, they might think the US is near a recession. And if they just looked at housing, they'd think the economy is recovering. Which is it?

First, the decline in the ISM index was partially driven by exports (no surprise given the problems in Europe and slowdown in China). The ISM export index declined to 47.5 in June from 53.5 in May, the lowest level since early 2009. However some of this export weakness will probably be offset by lower oil and gasoline prices.

Second, the current ISM reading of 49.7 isn't all that weak. Goldman Sachs analysts noted yesterday: "A reading such as this has historically been associated with just under 2% real GDP growth--very near our current second-quarter tracking estimate of 1.6%."

Third, housing is usually a better leading indicator for the US economy than manufacturing. Historically housing leads the economy both into and out of recessions (not out of the recession this time because of the excess supply in 2009). Manufacturing is more coincident. So the ISM index suggests some weakness now - mostly abroad - whereas housing suggests an ongoing sluggish recovery.

Who ya gonna call? Housing.

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