The ISM manufacturing PMI has dipped below 50 for two straight months, which suggested that the US manufacturing has at least been slowing somewhat, if not down right contracting.
Of course, this also suggested that the US economy has slowed somewhat in the recently months, but not quite near a recession yet. The July jobs report, for instance, was quite strong (at least on the surface).
In fact, sub-50 ISM readings don’t always come with recession. The chart below from Barclays show the ISM could dip below 50 without followed by a recession (shaded areas).
Source: Barclays Capital
But during these periods of sub-50 readings which were not followed immediately by recession, the Federal Reserve happened to be easing monetary policy in those periods. Another possibility is that the Fed eased in the past when they saw persistent sub-50 ISM readings:
Indeed, history suggests that the Fed tends to act when the ISM remains below 50 for several months, even when the broader economy is not in recession (Figure 1 and 2). In all three periods in the past 20 years in which this occurred, the Fed has cut interest rates (Figure 2).
Source: Barclays Capital
This article originally appeared here: Sub-50 ISM readings and non-recessions
Also sprach Analyst - World & China Economy, Global Finance, Real Estate
Read more posts on Also Sprach Analyst »
Please follow Money Game on Twitter and Facebook.