Monday, March 2, 2009

Is that the FAT LADY singing?? Already?

You know the story. It's not over 'til the Fat Lady sings. Where ever that is.

The expression made famous by baseball linguist Yogi Berra may apply now to our economy and to its recession. It would be fitting that a recession that fooled everyone, seemed like it was not one at all, then seemed mild, then seemed severe and is now being called 'a depression' by many would end just as the greatest investor or our time, Warren Buffett, has said the year will be toast and there could be a multi-year hangover. This recession has made fools of just about everyone in one way or another. Why stop now?

But why the optimism? Fair question.

Answer: My cyclical index from the ISM data, of course.

The chart above shows the plot of the index from the inception of the ISM data. The chart plots the cyclical index against the bands of historic recessions. The cyclical index is a ratio involving three ISM components. I average the orders index and the production index then take that average as a ratio to the employment index. Since orders is a leading series, production is coincident and employment lags I get a a ratio that identifies the manufacturing sector in transition.

The chart shows clearly that this plain vanilla index reaches lows in or just before recessions then jumps though hoops late in recessions or early in recoveries- just as it has done in this cycle -and as it is doing right now. The signal is as authentically strong just as it was authentically weak previously in this recession. The signal has been very reliable. See the chart above and how the indicator has oscillated around the economy's recession bands. .

I am encouraged that the manufacturing sector is saying that the turning point lies ahead and not too far ahead at that. The history of this simple well grounded indicator is there in chart for all to see.

The future bears some watching with a closer, more optimistic, eye because of it.

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