Positive Surprise Should Boost GDP Estimates
10/03/2011 3:13 pm EST
On Friday, the Economic Cycle Research Institute, which has a good record in predicting the ups and downs of the business cycle, told its clients that the US economy is headed into recession. (For more on that call and a little horn tooting by the ECRI, see this.)
Even if the institute is right, though, that doesn’t mean the road to recession won’t be paved with some bumps and potholes. (Don’t confuse the Economic Cycle Research Institute, which is in the business of predicting the business cycle for clients with the National Bureau of Economic Research, which calls the cycles after they’ve happened.)
So today, just days after the institute’s recession call, the Institute for Supply Management reported that its manufacturing index had climbed to 51.6 in September from 50.6 in August. (Remember, anything above 50 shows that the manufacturing sector is expanding.)
It looks, though, like this improvement in the index could be short-lived. The gains came with a continued fall in the backlog of orders sub-index, as new orders declined for a third consecutive month. It sure looks like manufacturers are running down their order books.
Also today, the Department of Commerce reported that construction spending had surged by 1.4% in August. That pretty much wipes out the 1.4% drop in July. Economists had expected construction spending to drop by 0.5% in the month.
The surprising growth came in the public sector, where construction spending climbed 3.1% in August after falling 1.5% in July. Economists had expected a decline for the month, arguing, logically, that spending cuts by state and local governments would cut into construction spending. Private residential construction spending climbed 0.7% in the month.
One month’s data doesn’t make a trend, and I’m frankly skeptical about the staying power of these increases in factory production and construction spending. Today’s numbers don’t, in other words, prove that the Economic Cycle Research Institute’s recession call is wrong.
But in the very short term, this positive news does buttress my case that third-quarter GDP growth in the United States is likely to be stronger than expected. The numbers on construction spending, for example, go straight into the GDP calculations.
The initial read on third-quarter GDP growth will be reported October 27.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. For a full list of the stocks in the fund as of the end of June, see the fund’s portfolio here.
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