Courtesy of Lee Adler of the Wall Street Examiner
Unlike the ISM manufacturing index, the ISM Non Manufacturing (Services) New Orders Index correlates reasonably well with the overall US economy, but like the manufacturing gauge, isn’t very useful as an indicator of stock market. While May’s performance in this indicator was positive, it wasn’t especially supportive of ebullient US stock prices, not that there’s anything wrong with that. If you’ve followed my reports for any length of time, by now you’ve gotten used to the idea that stock prices measure liquidity, not corporate profits or the performance of the US economy.
The headline number for the non-manufacturing index for May was 53.7, a positive reading that was close to the economic consensus of 53.5. That’s not a blockbuster number, but anything above 50 signals expansion.
As with the manufacturing data, my focus here is on the not seasonally adjusted (actual) index of new orders. It was strong in May at 53.1, up from 51.2 in April. I use actual, not seasonally adjusted data, to avoid the misinformation inherent in seasonally adjusted data.
May is virtually always an up month. This year’s May gain was nearly 2.0. The average index gain for the past 10 years was 2.3. Last May had a gain of 2.7. I’ve drawn a line on the chart connecting the May reading each year. The trend has been nearly flat for the past two years, but it has remained in positive territory above 50, signifying slow but steady growth.
The Non Manufacturing index represents the bulk of the US economy. It is less volatile than the Manufacturing index which is subject to the large swings inherent in capital goods orders. The non-manufacturing (services) sector of the US economy has held up while the manufacturing sector has weakened.
The negative divergence between this index and stock prices may be a long term warning sign, but negative divergences persisted for 4 years before the markets topped out in 2007. Therefore, like the ISM Manufacturing index, this indicator cannot be used for market timing purposes. The performance of the index versus stock prices does suggest that the Fed is driving stock prices to levels which can only be sustained by continued money printing. The new orders indexes suggest that economy is not responding in kind and that the economy probably does not have self sustaining momentum without the Fed providing artificial stimulus and US continuing to defecate spend.
ISM Non Manufacturing New Orders Index Chart- Click to enlarge
And no, the fecal cliff secastration hasn’t hurt the US economy. While the spending cuts and tax increases were large enough to reduce the deficit and reduce Treasury supply, which was bullish, they were not large enough to push the mammoth, slow moving US economy off its recent track. Policy tinkering is meaningless given the size and momentum of the economy, and all the constant gnashing of teeth about policy is a sideshow that traders and investors should ignore.
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