Bull Vs. Bear - Slim Chance Of Another Recession

By Will Ashworth | October 02, 2012 AAA

Question: Is America facing another recession?

Bull's Response
The Institute for Supply Management (ISM) announced the September manufacturing numbers October 1 including the PMI, which came in at 51.5%, 190 basis points higher than in August. More importantly, the September expansion in economic activity in the manufacturing sector broke a three-month contraction that was keeping the PMI under 50%. Although the economy is still very fragile, the surprise jump in the PMI suggests we aren't headed into a recession.

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PMI
The PMI is divided into five equal parts: New Orders, Production, Employment, Supplier Deliveries, and Inventories. The two indexes that stood out for me in September were New Orders and Employment, where both notched all-important growth in the month. In the case of new orders, the 520 basis point increase to 52.3% was the best performance in the past four months. Seventy-five percent of those surveyed said new orders were better or the same in September, compared to 71% in August.

The last time I checked, growth in new orders was a good thing. The second number that I feel is important is the employment figure, which increased for the 36th consecutive month. Eleven industries out of 18 reported employment growth in September - a big reason why the overall economy has increased for 40 consecutive months. It's clear that American factories are holding up better than those in Europe and Asia. The overall PMI number definitely caught most experts off guard, as they were expecting a reading between 48 and 51.2. It's possible that manufacturers took a summer break just like the rest of us.

Made in America
Boston Consulting Group surveyed the executives of American manufacturers with more than $10 billion in revenue about their plans for reshoring jobs from China, 48% were already doing so or considering the move. It further suggests that manufacturing exports could increase by $90 billion by 2015 as U.S. wages compared to other developed nations become far more competitive. In addition, as China's wages continue to rise, the logistical costs of producing goods halfway around the world become harder to justify. Made in America makes good business sense.

In August 2010, I penned the article 4 Reasons Why 'Made in the USA' Wins. In the article, I highlighted A.O. Smith (NYSE:AOS), Intuitive Surgical (Nasdaq:ISRG) and Arctic Cat (Nasdaq:ACAT) as examples of companies that were manufacturing most or all of their products in the U.S. My rationale for "Made in America" was that it was practical. Boston Consulting estimates that as many as five million jobs will be created in manufacturing over the next decade, many of those jobs a result of American companies reshoring jobs from China. The ISM employment number would seem to lend credence to the fact that it's been underway for a while now.

SEE: The 6 Signs Of An Economic Recovery


Stock Market
The markets are a leading indicator of economic growth six to nine months out of the year. September saw the S&P 500 increase by 2.4%, the second-best monthly return in the past half-year and the 21st best monthly return (out of 43 months) since the market low in early March 2009. It's not coincidental then that the ISM points out that September was the 40th consecutive month of economic growth. From an investor standpoint, you have to like the look of this chart. Both the economy and the unemployment rate are similar to where they were during Ronald Reagan's first term as President.

The only difference being that Reagan's unemployment rate dropped far more dramatically in the second half of his first term due to the passing of the Tax Equity and Fiscal Responsibility Act in September 1982, which rolled back some of the tax cuts introduced a year earlier. While the economy and unemployment could always be better, the manufacturing sector is much stronger than people realize.

The Bottom Line
The Republicans would have you believe that the economy is on death's doorstep. The reality is that while the economy is sputtering, it's a lot stronger than it was in late 2008 when Obama was elected. Boston Consulting's research into the return of manufacturing in the U.S. makes it abundantly clear that at least on this front, things are going to improve from here on in, which tells me that the odds of falling into a recession are extremely slim.

At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.

Don't forget to read the Bear Side of this debate and weigh in with your opinion below.

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