ISM Reports as Indicators of Recession

This chart shows the ISM Manufacturing and Non-manufacturing Diffusion Indices for Business activity from July 1997 to January 2008. A number below 50 indications contraction, and a number above 50 indicates expansion.

Also on this chart is a gray bar indicating official NBER recessions, and the annual rate of change in Real GDP compounded. Obviously a number below zero (0) is negative growth.

The conclusion is that a dip of both the Non-Mfg and Mfg numbers below 50 are very strong indications that the economy is in recession. In the current situation the Non-Mfg index is screaming recession as of the number given today, which is why the market sold off. However, the Manufacturing number is strangely resilient, especially considering the weak state of manufacturing in the US.

The future revisions of the Manufacturing Index will be watched closely, including any subsequent report such as the upcoming number in February. If the Manufacturing number swings back down below 50 look for most economists to start upping their calls that the economy is in recession.

We believe that we are in recession already with little doubt based on the Jobs and other indicators we have shown in earlier postings. NBER usually makes the official call by the time the recession is over. We think this one might last a little longer that the 2001 recession.