If you have been wondering whether a statistical recovery is at hand, today's ISM manufacturing report should be the clincher.  The report was definitely bullish with the ISM index rising to 55.7 and sub-components supporting the understanding that the manufacturing sector is expanding. This is quite a contrast to last month's weak data and demonstrates that last month was a one-month aberration in what should now be seen as a full-blown technical recovery.

I want to talk about this recovery briefly in the context of the signs that came before it, my own forecasting psychology and what the future holds.

The ISM data

The key data points to see as evidence of a fairly broad-based expansion in manufacturing come from new orders, production and inventories.  The production number came in at an incredibly bullish 63.3, marking the fifth consecutive month of increase. New orders slipped slightly, but were also in striking distance of the 60 range. (50 represents the demarcation between expansion and contraction).

But, from my perspective, it is inventories which are the most bullish data points. The inventories data show that inventories in the manufacturing sector were still being purged in October even while production is increasing.  That means that inventories are likely to make a huge contribution to GDP going forward in Q1 and Q2 of 2010. GDP could again surprise to the upside.

My mea culpa on forecast herding

All of this suggests the economy has been growing since the beginning of Summer. In the early Spring, I indicated that jobless claims were peaking (which added to my stock market bullishness at the time). This call turns out to have been accurate. However, at the time, this post produced very negative sentiments, albeit more from readers on Naked Capitalism than Credit Writedowns – in my opinion because most people erroneously extrapolate a current trend into the future (see my reaction to this from a post weeks later, "Through a glass darkly: the economy and confirmation bias in the econoblogosphere")

Nevertheless, a piece from NBER guru Robert Gordon that I reported demonstrated to me that I was not alone in seeing the trend reversal in jobless claims. Eventually, in May I indicated that the jobless claims data were pointing to an imminent recovery and remarked that the data had usually been fairly accurate in the past.

And for the record, I have said I see a recovery happening probably in Q4 2009 or Q1 2010 (see my post "The Fake Recovery").

The real question is how robust a recovery are we going to have and this is directly related to why the jobless claims series has been sending a false signal.  Now, initial claims has been sending a recovery signal since January.