Uncle Sam powers on

Well, my four punch US data knock down thesis just got KO’d. Last night’s ISM came in hot:

Economic activity in the manufacturing sector expanded in April for the 33rd consecutive month, and the overall economy grew for the 35th consecutive month, say the nation’s supply executives in the latest Manufacturing ISM Report On Business.

The report was issued today by Bradley J. Holcomb, CPSM, CPSD, chair of the Institute for Supply Management Manufacturing Business Survey Committee. “The PMI registered 54.8 percent, an increase of 1.4 percentage points from March’s reading of 53.4 percent, indicating expansion in the manufacturing sector for the 33rd consecutive month. Sixteen of the 18 industries reflected overall growth in April, and the New Orders, Production and Employment Indexes all increased, indicating growth at faster rates than in March. The Prices Index for raw materials remained at 61 percent in April, the same rate as reported in March. Comments from the panel generally indicate stable to strong demand, with some concerns cited over increasing oil prices and European stability.”

As I’ve warned, the correlation between the ISM and the regionals is loose and they quite often diverge for a time. The slowing that’s obvious across the regionals should show up in the ISM in the next few months. But with the leading indicator of new orders bouncing nicely I have to say I have doubts about which index will converge with which.

Adding to my woes, Fed President Jeffrey Lacker reckons rates may have to rise in 12 months, which I find hard to believe.

The conundrum is captures nicely in a new note by my favourite Australian US watcher, NAB’s Antony Kelly:

Our view has been that if recent employment trends were to continue then additional QE would be unlikely, but that a run of softer than expected economic data (particularly on the employment or inflation front) and/or bad exogenous news (eg a ramp-up in the euro-zone’s problems) could trigger further action. Particularly important is the labour market, with the Fed Chairman indicating in his post April meeting press conference that if unemployment does not continue its downward path then this would be a possible trigger for further monetary easing. Part of the recent debate in the US has centred around the relatively high 30 April 2012 job gains in late 2011/early 2012 given the modest-to-moderate rate of GDP growth, and whether this would be sustained. The weaker employment data for March and the recent increase in initial jobless claims serve to highlight the risk that employment growth may be sluggish in coming months, doing little more than accomodating new entrants to the workforce. Therefore, while QE3 is not on the table right now, it is too early to write it off completely.

I am obviously more oriented towards the need more QE in the second half of this year. But today’s ISM clearly goes with the bulls.
2012-04-30 US 2012 Q1 GDP (1)