Growing Under Our Noses

The economy is almost certainly growing, right now, right under our noses. Sure, the latest GDP was negative, but it was an aggregate for April through June. It's August now and a couple of high quality, under-appreciated indicators say the economy has probably been growing for as long as a couple of months.

First, the ISM Purchasing Manager's Index, just released for July manufacturing, came in at 48.9, after a 44.8 for June and 42.8 for May. I'm surprised how often it is wrongly reported that a PMI under 50 means the economy is contracting. A popular personal finance magazine recently published exactly this gaffe, and a major financial newswire posted it on the internet a while back.

Truth squad: a PMI of 50 is the benchmark for manufacturing activity only; repeated results higher than about 42 indicate growth in the overall economy. The ISM written analysis has stated for three consecutive months that the economy is growing, and private economic forecasters are telling clients exactly what the PMI numbers say: the recession ended in May or June.

A second somewhat under-followed measure (despite huge PR activity) is the ECRI set of leading indicators (not to be confused with the more popular Index of Leading Economic Indicators from the Conference Board).

The ECRI indicators are specifically designed to ferret out economic turning points, a task usually daunting enough to make forecasters look worse than fortune tellers. As long ago as April, all three ECRI leading indexes suggested the recession would end this summer.

Other signs of growth include a steep yield curve (which individual investors often think of as signaling inflation rather than growth) and, of course, the rising stock market. In the coming months a new GDP report will make official what the market already knows.

And what might an investor do? A big lesson is that waiting to be 'sure' almost always means waiting too long. So find a stock allocation you can live with, then stick with it. And if your sector weighting is still defensive, it may be time to rebalance into more economically sensitive industries, including some that haven't made big moves yet. No matter what the shape of the recovery, owning stocks with rising dividends makes such strategies easier, because these 'low sweat' stocks pay you more and more cash whether the recovery steepens or stumbles.

For more about waiting for good things, see "Cat on a Cold Stove" (posted here July 23, 2009) and "S&P 999+" (August 2, 2009).

Background links:

http://www.ism.ws/ismreport/mfgrob.cfm

http://www.newsweek.com/id/206631