Fisher Investments Editorial Staff
Developed Markets, Emerging Markets

Reading Rainbows

By, 08/04/2009
Story Highlights:
  • Rises in July's manufacturing readings around the world sharply beat expectations, though some remain at levels indicating contraction.
  • Sequential data, rather than year-over-year comparisons, can indicate whether or not the economy is climbing out of recession.
  • Improvements in manufacturing alone don't signal broad economic recovery. Still these improvements are a positive glimmer.

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Passing storms often yield rainbows—arcs of vibrant color against a gray canvas, rewarding those who endured the tempest. To those looking for signs the economic storms have passed, July's global manufacturing readings contain a hint of Technicolor tint.

In the US, the Institute for Supply Management's (ISM) manufacturing index rose from June's 44.8 to 48.9—soundly beating expectations of a 46.5 reading. The ISM report also showed new orders jumped from 49.2 in June to 55.3 in July. The UK's purchasing managers' index rose from 47.4 in June to 50.8 in July, also sharply beating original estimates. The eurozone's purchasing managers' index rose from 42.6 in June to 46.3—including a record jump in Germany. China's official July manufacturing index showed continued expansion.

Make no mistake—many of these indexes are still at contraction levels (readings under 50.0 indicate contraction, while readings above 50.0 indicate expansion), but upticks from prior months are encouraging. Right now, it's important to look at sequential data, rather than year-over-year figures, to gauge whether or not the economy is progressively climbing out of recession. Today's year-over-year comparisons (or similar assessments) show how the economy measures up against pre-panic financial crisis levels—not as helpful as sequential data in determining if the economy is rebounding from a low. In normal growth periods, year-over-year comparisons are usually more important because folks are more concerned with how they are doing this year versus the last.

We've previously mentioned new business technologies helped firms react to this economic downturn with alacrity, sharply reducing inventory levels and trimming production. As the economy improves and firms gear up for growth, it wouldn't surprise us if the same technologies help firms ramp up faster than most are expecting, largely due to the same features. Current rises in manufacturing from month to month could be a sign some firms are already seeing—and preparing for—a rebound.

Manufacturing is the backbone of many economies, but improvements in manufacturing alone don't signal broad economic recovery. (Note: The US is one of the world's largest manufacturers, but its services sector is even larger.) Still, these improvements are a positive glimmer. The fact most of these metrics are beating widely held expectations globally could also mean the recovery might happen faster and stronger than generally presumed—a very bullish possibility.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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