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ISM: Manufacturing Activity Contracts In November

 December 03, 2012 01:35 PM

An early peek at economic activity for November tells us to keep our optimism in check. The ISM Manufacturing Index dropped to 49.5 last month, the first dip under the neutral 50 mark since August. In short, we have a new data point that turned negative for profiling the economy. Is it a robust sign that the economy's tanking, or is this another head fake courtesy of Hurricane Sandy's distortions on the economic trend? The answer—not to be confused with the speculation in the here and now—is waiting for us in the near-term future.

That won't stop any one from worrying now, of course. No explanation needed. The ISM index slipped to its lowest level in three years by inching below August's reading by the smallest of margins. As dips under 50 go for this metric, last month's swoon is modest. But in the current climate of recession in Europe and the potential for something similar in the U.S. (courtesy of Washington's fiscal follies), no one needs an excuse to wonder how it all plays out.

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"There are two ways of looking at this," Christopher Low, chief economist at FTN Financial, advises. "We had two months of growth and now we are back to contraction, that is one way. The other, which is a little more realistic is that since May the index has been very close to 50 and I think what we are seeing is that manufacturing has stalled and has yet to recover."

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Deciding which fork in the road we're on will take time and data. For now, November's economic profile is still mostly a blank slate, other than today's disappointing number. The critical question: how does the incoming data compare? If we receive deeper confirmation that the trend in November is cracking, can we believe it? If so, will there be a snap-back effect from post-hurricane rebuilding and (dare we say it?) a resolution to the fiscal cliff follies in Washington? Or might sanity in government come too late to save the cycle?

There are several reasons to reserve judgment on stating outcomes at this point, including a rival benchmark's conflicting message for the November read on manufacturing. "The expansion of the U.S. manufacturing sector gained traction in November, with the final Markit U.S. Manufacturing Purchasing Managers' Index (PMI) rising to its highest level in six months," Markit Economics also reports today.

One of these reports is misleading us. Which one? Stay tuned for the answer….
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