News Room - Business/Economics

Posted on 01 Oct 2009

US economy and manufacturing sector are in an expansionary mode.

V-SHAPED recovery? Or double-dip or W-shaped? The chart says it all. The jump and strength in the ISM manufacturing index for August surprised many people. At 52.9, the ISM index is saying that the overall US economy and the manufacturing sector are in an expansionary mode.

 

The ISM index is also recovering in a V-shaped manner and has even gone above the August 2008 level before the collapse of Lehman Brothers knocked everyone out. Frankly, it cannot be more V-shaped than this.

 

Interestingly, not only did the headline figure jump but a look at the key sub-components shows numerous positive signs as well. Importantly, the index for exports and new orders jumped substantially. Yet, despite all these positive numbers, the New York Stock Exchange (NYSE) sold off. Why?

 

First, the NYSE has rallied strongly without a meaningful correction. The index has jumped 55% in six months and yet it has not undergone a 10% correction (although no one really knows why it has to be a 10% correction). This makes many people nervous and for those who got in during the panicky lows in early 2009 and have a short-term investment horizon, there is actually plenty of profit to take. Secondly, many investors are looking at September and October and are worried that these two ghostly months will be cruel months. Mark Twain would totally disagree with this stock market superstition but old mother’s tales are hard to dispel.

 

Nevertheless, from 2003 to 2007, September and October were normal months. The same observation applies to the period from 1991 to 1999. With so much fear and worry still in the air, with still so many analysts, professors, policymakers and investors still warning over the economic outlook, September and October 2009 may turn out to be surprisingly normal months – no great crashes, no catastrophes, no new panics but just the usual ups and downs. Thirdly, most analysts, professors, policymakers and investors are still greatly sceptical that the US economy or the global economy is on a sustainable recovery path. They are still looking for the other shoe to drop as they are still expecting a double-dip or a W or the other 25 letters of the alphabet except V.

 

It is not surprising that these people are still sceptical. To i Capital, it all boils down to cause and effect. The pessimistic see the most recent recession as being caused by the US subprime and housing problems. The pessimistic see the current recovery as being a result of the various stimulus packages and that once the beneficial impact runs out, the economic recovery will falter.

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To i Capital and a very selected few, the recession was all due to the global panic created by the inconsistent US government policy with regards to the rescue or non-rescue of the US financial institutions. Essentially, the collapse of Lehman Brothers triggered the Mother of all Panics.

 

Once this panic subsides and confidence returns, the economy will recover. Besides generating necessary but temporary demand, the various stimulus packages gave a much-needed boost to confidence, whether it is related to consumers, businesses or the financial markets.

 

They were necessary to prevent a vicious cycle from happening. After all, more than 90% of US workers are still employed and tens of thousands of small and large US firms are still operating. With their confidence recovering, the economic recovery will then gain impetus from the normal sources again.