For the second month in a row, the ISM Manufacturing Index was under 50—a sign that the manufacturing sector is contracting, if only slightly. Many analysts argue that a reading under 50 for this benchmark is an early warning that a new recession is near, or perhaps one that's already started. But like any other indicator, the ISM index isn't flawless: there have been a dozen or so instances over its 60-year-plus history when a below-50 reading wasn't quickly followed by a recession. Still, the fact that this benchmark is now under 50 for the second consecutive month—the first run of below-50 readings since the last recession—is a sign that the manufacturing sector is struggling.
All the more reason to watch weekly update on new jobless claims for another clue about the broader economy and whether it's weakening, or not. The previous news on initial claims suggested that the labor market wasn't caving, a view that drew fresh support with this latest ADP report. If the next data point on claims doesn't pop, and we see improvement in the government's July estimate of private payrolls, the case for seeing today's ISM number as noise will resonate.
Is that relatively rosy scenario plausible? Yes, according to the range of consensus forecasts for tomorrow's claims update via Bloomberg. Economists expect new claims as low as 340,000 up to 380,000 vs. last week's 353,000 (seasonally adjusted). The outlook for the growth in private payrolls for July in Friday's report ranges from 80,000 to 180,000 vs. the reported 84,000 for June. Plausible still leaves plenty of room for disappointment, however.
About the Author - James Picerno is a veteran financial journalist since the early 1990s at Bloomberg, Dow Jones, etc. before becoming an independent writer/analyst/consultant in 2008. James is also the author of Dynamic Asset Allocation (Bloomberg Financial, 2010) and he writes at The Capital Speculator. (EconMatters author archive here)
The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.
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