They're Back
Ernie Mardaga
January 7, 2005
It's January, and the economic pundits are back, forecasting
the U.S. economy for the new year - and most financial publications
have polled Wall Street's "best and brightest" for
their outlook. Investors should ignore this for at least three
reasons:
(1) economic forecasts (including these polls) are notoriously
wrong,
(2) stocks will falter before the economy does (which
is why the stock market is considered a leading economic
indicator), and
(3) an exogenous event (e.g., oil price shock [1], major act
of terrorism [2]) could instantaneously make even the
best guess null and void. But, if you still want an indication
that's as good as any, and better than most, read on.
The biggest question and concern
is whether or not a recession is likely in the near future. The
chart that follows compares the Purchasing Managers Index, compiled
by the Institute for Supply Management (ISM, www.napm.org)
- formerly the National Association of Purchasing Managers -
with "official" recessions defined by the National
Bureau of Economic Research (NBER).
Close analysis of the chart
shows that it's not perfect, but it's very good. In fact, it's
even better than it looks because NBER pronouncements are always
long after the fact - typically, something like, "The economy
entered recession nine months ago."
My oh my, how we'd like to have such latitude!
The bottom line: the ISM PMI shows no sign of recession,
but it, too, is subject to (3) above.
Happy New Year! (we hope)
January 6, 2005
Ernie Mardaga
Editor
Your Mutual Funds®
www.yourmutualfunds.com
Email the author at ccm@yourmutualfunds.com
Footnotes:
[1] The oil price shocks of 1973 and 1979 were unforeseen exogenous
events that quickly sent the economy into recession, resulting
in late signals by the PMI - see our September 2004 Chart of
the Month, "Over
a Barrel?"
[2] The PMI had, by chance, registered
sub-45 readings prior to the 9/11 attacks in 2001.
Ernie Mardaga.
is the editor of Your Mutual Funds -- a family of e-newsletters
for mutual fund investors.
321gold
Inc
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