Nothing but good news on the data front this morning. Or was it? Pending home sales came in 6.1% higher for September. We should note, however, despite this strong report the recent news on existing home sales has been very weak and showing certain signs of seasonal weakness. Construction spending also came in better than expected at 0.8% for September. The August revision, however, essentially nullifies the data as the August data was revised down to -0.2%. On a year over year basis, construction spending is still representing the very weak economy. There has been no uptick in construction spending despite the recovery.
The data of the day was the ISM report. Stocks are loving the data, but a look under the hood shows that the momentum from this report is unlikely to be repeated in future reports. The majority of the strength came in coincident and lagging indicators while most leading indicators were flat or down. Econoday reports:
Coincident and lagging indicators, not leading indicators, gave a big lift to the ISM’s manufacturing index which jumped more than 3 points in October to 55.7. Employment, a lagging indicator, was a standout, at 53.1 for a nearly 7 point gain to indicate, at a plus 50 reading, that manufacturers actually added to payrolls in the month. The rise in the workforce is in response to output needs as the production index, a coincident indicator, rose more than 7-1/2 points to 63.3. Inventories, like employment a lagging indicator, also gave a big lift to the index, rising nearly 4-1/2 points to 46.9 as the destocking phase in manufacturing moves to a restocking phase. Price increases were steady in the month, showing little change at 65.0 vs. 63.5 in September. Delivery delays were also stable, at a moderate 56.9.
The major leading indicator in the report, new orders, showed month-to-month improvement but at slower rate, at 58.5 vs. September’s 60.8. This points to a lower month-to-month percentage gain in October for durable goods orders which jumped 1.0 percent in September. This is a major offset to other gains in the report, suggesting that forward momentum is not accelerating. But markets are definitely accelerating in reaction to the report, with stocks and commodities shooting higher, especially oil which has jumped more than $1 in immediate reaction to $78.
Comments from the report were mostly negative:
- “We are beginning to be affected greatly by lead-time increases on semiconductor components.” (Computer & Electronic Products)
- “Still a very difficult environment — commodity increases threaten recovery and don’t seem to correlate with any supply/demand fundamentals.” (Food, Beverage & Tobacco Products)
- “Automotive demand still remains strong even after ‘cash for clunkers.'” (Fabricated Metal Products) [indicated for the second month]
- “After several rather busy months, we are seeing the order intake for early next year soften.” (Transportation Equipment)
- “The improvement seen earlier is not holding.” (Primary Metals)
Investors are very excited about the “better than expected” headline figure, but the look under the hood shows plenty of problems ahead.
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.