Two reports released today on manufacturing and home sales appear to indicate that the U.S. economy may, in fact, be on the mend. Although the third quarter's 3.5% GDP growth appeared to indicate this, subsequent spending and wage data clouded the picture. These reports swing the pendulum back in the positive direction.
The recovery in manufacturing strengthened in October as the PMI registered 55.7 percent, which is 3.1 percentage points higher than the 52.6 percent reported in September, and the highest reading for the index since April 2006 (56 percent). A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.
One key item I see above is customer's inventories. They appear to be "too low," indicating that the time is coming when retail vendors will have to begin using some of the cash they've been hoarding to spend again. That has nothing to do with stimulus.
This is the first month of growth in manufacturing employment following 14 consecutive months of decline.
It should also be noted that exports continue to increase as the dollar continues to decline. What's bad news for the dollar is good news for U.S. manufacturing's exports. Ironically, the stimulus may have weakened the dollar a bit, but to the manufacturers' advantage.
The Pending Home Sales Index, a forward-looking indicator based on contracts signed in September, rose 6.1 percent to 110.1 from a reading of 103.8 in August, and is 21.2 percent higher than September 2008 when it stood at 90.9. The gain from a year ago is the largest annual increase on record, and the index is at the highest level since December 2006 when it was 112.8.
"What we're witnessing is a rush of first-time buyers trying to beat the expiration of the tax credit at the end of this month," he said.
"Home values will stabilize sooner rather than over-correcting. That, in turn, will mean wealth stabilization for the vast number of middle-class families and lay the foundation for a durable economic recovery."
Either that, or values will just fall through the false bottom set by the government program. The outcome will depend more on how high inventories are and how for long high foreclosures continue. I'm skeptical, but hope he's right.