Monday, 7 September 2009

Purchasing managers say US recession has ended

At the beginning of each month, the focus of attention of most economists in the United States is the non-farm payroll report. However, for those looking to see whether the economy has turned around, last week's reports on purchasing managers' surveys may have provided the more significant data.

The non-farm payroll report from the Labor Department showed that employment continued to decline in August. Non-farm payroll employment fell by 216,000 while the unemployment rate rose to 9.7 percent from 9.4 percent in July.

Despite the continuing decline in employment, the rate of contraction has moderated. Employment had fallen by 276,000 in July and 463,000 in June.

Still, if you are looking for indications that the US economy has stopped contracting, the employment report is providing little of it.

Rather, clearer indications that the economy has turned around came last week from the Institute for Supply Manufacturing. Its survey of purchasing managers in manufacturing generated a PMI of 52.9 in August, up from 48.9 in July. This marks a return to expansion for the manufacturing sector.

Perhaps even more impressively, the new orders index jumped to 64.9 in August, the highest level since December 2004, from 55.3 in July, thus marking a second month of expansion.

The August survey of purchasing managers in the non-manufacturing sector produced a less optimistic picture. The non-manufacturing index came in at 48.4, below 50 and thus suggesting continued contraction, although it was an improvement over the July reading of 46.4.

However, some sub-indices for non-manufacturing are showing that the contraction may already be coming to an end. The business activity index jumped to 51.3 in August from 46.1 in July. The new orders index rose to 49.9 from 48.1.

The ISM purchasing managers' indices had been somewhat timely in signalling a turn in the cycle at the start of the recession. Back in December 2007, both the manufacturing PMI and new orders indices had fallen below 50 simultaneously for the first time in the cycle while both the non-manufacturing business activity and new orders indices were above 50 for the last time in the cycle. December 2007 turned out to be the peak of the cycle.

So the recent improvements in the ISM indices certainly bode well for the economy. They are probably among the indicators providing the clearest signals yet that the recession in the US has ended.

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