U.S. ignoring, or benefiting from, Europe misery
Thursday, 03 May 2012 | 16:30
After disappointing results from regional manufacturing indexes, markets were set up for a decline in the national Institute for Supply Management’s manufacturing gauge, which is one of the most well-regarded economic indicators.
So of course, the ISM gauge accelerated in April, and key subindexes for new orders and employment improved as well. Stocks rallied in reaction.
So what happened? Well, the regional gauges, while disappointing, weren’t actually that bad. For instance, the Philadelphia Fed reading of 8.5 on a -100 to +100 scale really isn’t all that different from the ISM’s 54.8% reading on a 1 to 100 scale.
Perhaps more of a relief is that the manufacturing sector, one of the bright spots of the U.S. economy, is still hanging in there. The ISM data is consistent with annualized growth of 3.5% to 4% in the second quarter, according to Bank of America Merrill Lynch.
Clearly, the broader U.S. economy isn’t going to be expanding at that rate between April and June, but it’s not likely to fall back into recession if the manufacturing sector is that strong.
One point of interest is that the export index jumped in April. Could it be that U.S. manufacturers are taking orders from European rivals that are struggling to get financing from deleveraging European banks? Perhaps. A similar index from the euro zone reached a 34-month low in April.
An alternative theory is that American firms simply are better positioned in growth markets like China, not to mention the still-growing U.S. market, and less exposed to European misery.
The two differing theories have important implications for markets. If the U.S. is simply taking market share away from Europe, then overall global demand isn’t really accelerating, which means that commodities shouldn’t really react to the news. If the story, however, is that the world economy will still chug along despite the European mess, then that will have a different impact on asset prices.
In any case, the ISM data proved a welcome relief from some of the more dour reports that have been published of late. The more important question however is just how strong the payrolls report will be on Friday.
Source: Market Watch
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