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ISM indices continue to point to moderate growth

The September ISM manufacturing index was a tiny bit weaker than expected (54.5 vs. 54.4), but remains firmly in a range that in the past has coincided with 3-4% economic growth, as my first chart suggests. While this rate of growth is above the economy's long-term average of 3%, it nevertheless represents a fairly moderate recovery from a recession that was unusually deep. That's been the case for awhile, so in a sense today's report didn't change the outlook at all.

The export orders component (second chart) has weakened in recent months, but it too remains at levels that are consistent with economic growth, and it is far above any level that might suggest a double-dip recession.

The prices paid index jumped in September, and for my money it is signaling the existence of widespread and ongoing price pressures, something that is totally inconsistent with the Fed's and the market's preoccupation with how all the economic "slack" out there is deflationary. If the economy were even remotely on the cusp of a general and pernicious decline in the price level, you would think that some hint of that would be evident in this survey. But no, fully 70% of the ISM members reported paying higher, not lower, prices in September.

Finally, although the employment component of the ISM index dipped in September, it remains extraordinarily high. Since 1980, this index has only been higher in 14 out of 369 months. This suggests that the manufacturing sector continues to add jobs at a fairly impressive rate.

Adding it all up, the ISM report paints a solid picture of an economy that remains on a moderate growth track. Plus, it casts serious doubt on whether it makes sense for anyone—especially the Fed—to worry about deflation.

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