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Manufacturing doesn't deteriorate, and that is the good news



The ISM manufacturing report came in slightly better than expectations, but remains lackluster. 


As the chart above suggests, the ISM manufacturing index is consistent with real GDP growth of 2 or maybe 3%. It's steady as she goes, and she isn't going very fast. Nothing new to see here.


Export orders continue to show some weakness, which is not surprising given the struggles in the Eurozone and the slowdown in China that have been widely remarked. Still, the recent readings are not weak enough to point to any serious problems, and the latest news from China—where the purchasing managers' index has been around 50 for the past several months—suggests that the slowdown has not worsened.


The prices paid index points to mild inflation pressures, nothing unusual.


The employment index has been only mildly positive for the past year. This suggests that manufacturing is not likely to pick up meaningfully nor deteriorate in coming months.

Add it all up, and it looks like the producers and risk-takers of the world have pulled in their horns in an attempt to brace for the uncertainty of the looming fiscal cliff. As a supply-sider I strongly reject the notion that the problem we have today is one of insufficient demand. On the contrary, the problem is insufficient "supply:" a dearth of new investment, risk-taking and work. Those are the things that create new jobs, and new jobs are the things that result in increased demand.

These facts do not paint a rosy picture of the future, but neither do they point to any meaningful deterioration on the margin. And that is the good news, since the market remains braced for bad news. 10-yr Treasury yields of 1.7% only make sense in a world where markets hold out very little hope for meaningful growth and indeed fear that another recession is practically unavoidable. As long as the economy avoids a recession, risk assets are going to continue to rise, albeit slowly.

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