The market was absolutely ecstatic after the ISM manufacturing report came in better than expected on Wednesday. More interesting, however, is that the market is showing little to no negative response to the ISM services report despite broad weakness. Make no mistake – the US economy is NOT a manufacturing economy any longer. This is a services economy, yet the market is apparently brushing off this report in favor of a meager job’s report.
The headline figure came in at 51.5 which was 1.5 points lower than expected – still expanding, but down sharply month on month. A look under the hood shows more alarming trends, however. Just like the manufacturing report on Wednesday the leading indicators in the services report were weaker than expected. New orders tanked 4.3 points to 52.4. Inventories and backlog also showed declines. The employment index, which includes government employees showed a contraction.
This is much more in-line with the regional reports and is likely a better representation of the US economy than the manufacturing index. If the regional reports hold true we should see further weakness going forward. The schizophrenic market likes what it sees for now, but make no mistake – the economic trend is down.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.