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PMI, GDP stink up the joint

The first revision of GDP growth for the second quarter rose at a (seasonally adjusted) 3.3% annual rate. This was below expectations of 3.4%, and the revised Q1 GDP data of 3.8%. (recall that GDP data for Q1 was revised due to the specious theory that new home prices had dropped for that quarter).

Meanwhile, the Chicago PMI utterly collapsed below the magic 50 level to 49.2 in August, down from 63.5 in July. This was well short of consensus expectations of 61.0, and was the weakest level since April 2003.

Chicago PMI components showing the largest declines were:

new orders (46.5 from 69.6 in July)
production (56.2 from 70.5 in July).
Order backlogs (45.7 from 56.1 in July).

Three of seven PMI components are now below the 50.0 boom/bust line: order backlogs (45.7), new orders (46.5) and supplier deliveries (48.7).

Wednesday, August 31, 2005 | 11:23 AM | Permalink | Comments (10) | TrackBack (0)
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Comments

And now the chatter is starting about how the Fed should pause their tightening campaign....

Not sure about others thoughts, but I think thats a bad idea with bad long-term ramifications....

Posted by: erikpupo | Aug 31, 2005 1:39:59 PM

Adding fuel to that fire; the yield curve has begun to invert, with 3 years yielding less than 2 years and so on down the spreads.

What does AG do now?

Posted by: erikpupo | Aug 31, 2005 1:44:33 PM

My bet is if you could get into the low Chicago PMI #'s it would be automotive, automotive and also automotive.

I doubt GM, Ford & DC will want to build ahead of demand and give them away like last month... if so they then really DO deserve to go broke.

Posted by: dryfly | Aug 31, 2005 8:49:46 PM

PMI should pick up in the fourth quarter as the remnants from Kartina are cleaned up - looking forward, manufacturing should gain ground as water treatment products, steel end products, earth moving equipment and concrete all pick up steam at the expense of declines in production of automotive and aerospace products (ex-satellites). Hello, GDP at 3.6% in the fourth quarter...X-mas rally in large cap value stocks, anyone?

Posted by: Aaron Koral | Aug 31, 2005 9:08:28 PM

We are already starting to see economic commentary saying katrina could be good for economy and stock mkt????? then why wait for a natural disaster....why not evacuate another big city and level it and we can increase all our wealths?? This is nonsense!

Posted by: pjfny | Aug 31, 2005 10:07:00 PM

Its called the Parable of the broken window
http://en.wikipedia.org/wiki/Broken_window_fallacy

it shows how ignant some commentators are

Posted by: Barry Ritholtz | Aug 31, 2005 11:30:50 PM

Curiously, Hurricane Katrina *will* be good for the economy, as measured by GDP. It's because the "G" in GDP means what it says; it's a measure of economic output gross of depreciation.

Posted by: dsquared | Sep 1, 2005 2:21:35 AM

Parable of the broken window:

The parable describes a shopkeeper whose window is broken by a little boy. Everyone sympathizes with the man whose window was broken, but pretty soon they start to suggest that the broken window makes work for the glazier, who will then buy bread, benefitting the baker, who will then buy shoes, benefitting the cobbler, etc. Finally, the onlookers conclude that the little boy was not guilty of vandalism; instead he was a public benefactor, creating economic benefits for everyone in town.

Bastiat's original parable of the broken window went like this:

Have you ever witnessed the anger of the good shopkeeper, James B., when his careless son happened to break a square of glass? If you have been present at such a scene, you will most assuredly bear witness to the fact, that every one of the spectators, were there even thirty of them, by common consent apparently, offered the unfortunate owner this invariable consolation—"It is an ill wind that blows nobody good. Everybody must live, and what would become of the glaziers if panes of glass were never broken?"

Now, this form of condolence contains an entire theory, which it will be well to show up in this simple case, seeing that it is precisely the same as that which, unhappily, regulates the greater part of our economical institutions.

Suppose it cost six francs to repair the damage, and you say that the accident brings six francs to the glazier's trade—that it encourages that trade to the amount of six francs—I grant it; I have not a word to say against it; you reason justly. The glazier comes, performs his task, receives his six francs, rubs his hands, and, in his heart, blesses the careless child. All this is that which is seen.
But if, on the other hand, you come to the conclusion, as is too often the case, that it is a good thing to break windows, that it causes money to circulate, and that the encouragement of industry in general will be the result of it, you will oblige me to call out, "Stop there! your theory is confined to that which is seen; it takes no account of that which is not seen."

It is not seen that as our shopkeeper has spent six francs upon one thing, he cannot spend them upon another. It is not seen that if he had not had a window to replace, he would, perhaps, have replaced his old shoes, or added another book to his library. In short, he would have employed his six francs in some way, which this accident has prevented.

The fallacy of the onlookers' argument is that they considered the positive benefits of purchasing a new window, but they ignored the hidden costs to the shopkeeper and others. He was forced to spend his money on a new window, and therefore could not have spent it on something else. Perhaps he was going to buy bread, benefitting the baker, who would then have bought shoes, etc., but instead he was forced to buy a window. Instead of a window and bread, he had only a window. Or perhaps he would have bought a new shirt, benefitting the tailor; in that case the glazier's gain was the tailor's loss, and again the shopkeeper has only a window instead of a window and a shirt. The child did not bring any net benefit to the town. Instead, he made the town poorer by the value of one window.

Posted by: Barry Ritholtz | Sep 1, 2005 6:43:57 AM

Hi Barry - thanks for the link on the "parable of the broken window". After reading the information on the link, I can see how one could interpret my opinion as "ignorant". My comment was only an opinion, and nothing more. This isn't to say that I, or others who may agree with my opinion, do not have any understanding of the "opportunity costs" forgone as a result of the destruction caused by Katrina. I empathize for the residents suffering there. My comment was only a guess as to what I thought could happen to GDP in the fuure as a result of this natural disaster. I would not "wish" such an event to happen to anyone simply for the sake of encouraging GDP growth - as I said, my comment was just an opinion. Thanks, though, for opening my eyes to a different way of thinking regarding the "unintended consequences" of a negative event occuring.

Posted by: Aaron Koral | Sep 1, 2005 12:25:24 PM

Hi Barry - thanks for the link on the "parable of the broken window". After reading the information on the link, I can see how one could interpret my opinion as "ignorant". My comment was only an opinion, and nothing more. This isn't to say that I, or others who may agree with my opinion, do not have any understanding of the "opportunity costs" forgone as a result of the destruction caused by Katrina. I empathize for the residents suffering there. My comment was only a guess as to what I thought could happen to GDP in the future as a result of this natural disaster. I would not "wish" such an event to happen to anyone simply for the sake of encouraging GDP growth - as I said, my comment was just an opinion. Thanks, though, for opening my eyes to a different way of thinking regarding the "unintended consequences" of a negative event occuring.

Posted by: Aaron Koral | Sep 1, 2005 12:26:58 PM