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ISM indices are very bullish






The Institute for Supply Management's indices of manufacturing activity are full of V-shaped recovery signs. To be sure, these are diffusion indices, so they don't measure the strength of the rebound in manufacturing conditions; they measure instead the breadth or scope of the improvement. For example, the first chart tells us that 58.4% of those surveyed reported seeing increased activity. In an historical context, this is quite an impressive number, and it has coincided with GDP growth of 5% or more—which is exactly what we saw in Q4/09. But whereas recovery skeptics dismissed the Q4 growth as mainly due to a decline in the pace of inventory liquidation, the ISM numbers are saying that the strength of the recovery is more impressive than the latest GDP statistics suggest.

It's noteworthy also that the prices paid index has jumped to 70, which means the vast majority of businesses are paying higher prices these days. That's not exactly the sort of stuff of which deflation—still a popular theme among the recovery skeptics—is made.

I'd say the economy is in classic recovery mode, and deflation is history. This is reason for great cheer, even if Obama's $3.8 trillion budget proposal is an abomination. More on that later.

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