U.S. manufacturing strengthens
What does this CBS News report say to you?
The stock market’s mood darkened after the Institute for Supply Management said its index of [U.S.] manufacturing activity in September slipped to 52.6 from 52.9 in August. The number fell short of analysts’ expectations.
It seems to me to say that U.S. manufacturing had weakened.
CBS’s hourly radio news bulletin reported the development Thursday evening in nearly these words, undoubtedly derived from the same CBS copy quoted above. What CBS did not explain on the air, and indeed what CBS does not explain even in the extended report linked above, is that the index in question of the Institute for Supply Management (ISM) reports not U.S. manufacturing activity but rather change in U.S. manufacturing activity.
To understand the difference, suppose that I introduced a new stock index, the Harrison Index, derived from the Dow Jones Industrial index in the following manner. If the Dow neither rises nor falls today, then the Harrison measures 5000. If the Dow rises 100 points today, then the Harrison measures 5100. If the Dow rises 200 points today, then the Harrison measures 5200. If the Dow falls 500 points today, then the Harrison measures 4500. And so on.
So, the Harrison is just an offset of the Dow, right? No, it isn’t; not at at all, as the following example will make clear. Suppose that the Dow had ended the previous week at 9000 and then closed at 9300, 9500 and 9600 respectively on Monday, Tuesday and Wednesday. That’s good for shareholders, but the Harrison reports 5300, 5200 and 5100 respectively on Monday, Tuesday and Wednesday. The Harrison is falling even as the Dow is rising because, although Wednesday was a good day for shareholders, Tuesday was better and Monday, better yet.
The ISM index is like the Harrison except that its break-even point is arbitrarily fixed not at 5000 but at 50. A falling ISM, which nevertheless remains over 50, means rising manufacturing. CBS News however never tried to explain this, probably because few CBS reporters really grasp this kind of thing. It’s too financial; which is to say, too numerical.
The lesson in this is twofold. First, U.S. manufacturing continues to strengthen as the Economic Nationalist has for the past year believed that it would, on the basis not of a tariff but of a moderately weakening dollar (the dollar’s moderate weakening may or may not yet develop into a rout—this writer, unlike the estimable Peter Schiff, tends to believe that it probably will not do so—but in any case the dollar’s weakening has been relatively moderate thus far). The rise of manufacturing should be expected to continue a few years in a manufacturing trend the likes of which we have not seen since 1973, after which manufacturing’s continued prosperity will depend on Congress’ willingness to raise a well timed tariff barrier (now regrettably not being the time for it). Second, it seems somehow to be an iron law of news that, the less a general-purpose national news reporter actually understands about business and finance, the more confident and condescending he will contrive to sound, even as he spouts utter, embarrassing, unilluminated nonsense.
Ignoring the general-purpose press, you should get your financial news from the financial media, who though they too can suffer biases actually understand what they are talking about when it comes to business and money. Here for instance is a workmanlike, much less verbose Forbes bulletin that unpresumptuously gets it right.
H.J. Harrison
[Those that think as the Economic Nationalist does have ripped a winning streak in recent years, have they not? It is really not so hard to think in this way, either, once you get the hang of it. Edmund Burke and Pat Buchanan have shown the way. Among the underlying premises are, first, that Adam and Eve fell and Jesus died for our sins (if you don’t yet see this connection then the evident reliability of the blog’s general predictions must continue to confound you, for this blog is about earth not heaven: a sound appreciation of the Fall is indispensable to it); second, that 1950s America was the greatest era in the greatest country that ever was and that it is largely unnecessary to dissect this fact (Burke admittedly had nothing to say on this point); third, that one should honor good behavior and, at all costs, avoid obscure misexplanations to excuse blatant bad behavior (justice and mercy, yoked together by prudence, governed by honor and duty, shielded by discretion, constitute the only right response to bad behavior; obscure misexplanations have no place); fourth, that racial equality, sexual equality, physical equality, mental equality, social equality, individual equality and the like simply do not exist, and that it is no use getting upset about this; fifth, that events are seldom governed by conspiracy but rather by mundane human nature; sixth, that emergent behavior is real, which is to say that large groups behave fundamentally differently than small ones do; and, seventh, that it pays to maintain good humor and to be patient. To internalize such precepts is not easy but you will find that the wide world makes rather more sense once you have done it. So internalize such precepts! Then maybe you can rip a winning streak, too.]
October 4th, 2009 at 3:35 pm
The quote indicates that the stock market responds to the time derivative of the actual manufacturing activity which is what the ISM index apparently approximates. I am curious as to why this is the case. If manufacturing activity is high, even if it is not increasing, that would seem to be a good time to invest (or so I would think). Who cares if it is not increasing? I can see where declining manufacturing activity would be cause for concern, so a negative derivative would be a red flag. But I’m really puzzled as to why there is concern when the index shows a derivative of zero or greater. Would you explain, Howard?
October 4th, 2009 at 7:16 pm
Dr.D:
For some reason the persistent inanity and general worthlessness of the general-purpose news media’s business coverage continues to surprise me. Unfortunately, purposeful, persistent inanity by evidently well spoken, seemingly quasi-intelligent people on the air is not something I can explain. Even liberal newspeople have no incentive I can see to show the nation, once per hour over the radio, how little they know about money. But that’s what they do.
The weird thing is that CBS’s management, which presumably does know something about money, allows this sort of thing to go on, year after year. This does not mean that CBS’s management is incompetent (if I asserted that they were, I should rightly invite the retort, “How come you’re not in charge of CBS if you’re so smart, then?”). It only means only that I do not understand the practice.
Fortunately, the U.S. financial news media are as a general rule rather reliable, so we are not required to turn to the likes of CBS for business coverage.
As to ISM, I do not know why they have formulated their index as an offset time derivative. Maybe the index was originally intended for a narrow, technical audience, and ISM never suspected that the index would become an item on the national news.
Howard