Wednesday, January 02, 2008

ISM Manufacturing Declines, Construction Spending Unexpectedly Rises

- ISM Manufacturing for December fell to 47.7 versus estimates of 50.5 and a reading of 50.8 in November.

- ISM Prices Paid for December rose to 68.0 versus estimates of 65.0 and 67.5 in November.

- Construction Spending for November rose .1% versus estimates of a .4% decline and an upwardly revised .4% decline in October.

BOTTOM LINE: Manufacturing in the US fell, triggering speculation that the Fed will cut interest rates by half a percentage point, Bloomberg reported. According to Norbert Ore, chairman of the ISM’s survey, the index would have to fall below 41.9 for two consecutive quarters to indicate the potential for a recession across the broad economy. The New Orders component of the index fell to 45.7 from 52.6 the prior month. The Inventories component fell to 45.5 from 46.9 in November. The Employment component of the index rose to 48 from 47.8 the prior month. The ISM Manufacturing Index fell below current levels for nine months during the 1995/1996 mid-cycle slowdown without pushing the economy into recession. It also fell below today’s reading in December 1998 during the Asian crisis without signaling contraction in the broad economy. I continue to believe the economy will grow around 1% in 4Q, but rebound to average around 2% GDP growth for all of 2008. I expect the ISM Manufacturing Index to bounce back next month on inventory rebuilding.

Spending on US construction projects unexpectedly rose in November as work on schools, power plants and factories surged, Bloomberg reported. However, construction on private homebuilding fell 2.5%, the most in five years, versus a 2.3% decline the prior month. Home construction has now declined for 21 consecutive months. Non-residential building jumped 18% from year ago levels. Private non-residential construction climbed 1.7% for the month. I continue to expect overall construction to remain muted over the intermediate-term as homebuilders work down inventories.

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