029: Understanding the ISM Index's Prediction of Recessive Trends 08-01-23

Are we standing on the brink of a recession? Join us as our Chief Investment Officer, Megan Horneman, takes a deep dive into the ISM Manufacturing Index - an often overlooked but crucial economic indicator. With a compelling discussion on how the index has plunged into contraction territory for a concerning nine months, Megan highlights how this has historically signaled an impending recession. Listen in as she unpacks each component of the index, all of which are also in contraction, and elaborates on the impact of these on inflation, the supply chain, and most crucially, the labor market. 

Megan doesn't hold back, bringing to light the troubling fall in employment rates, which are hitting lows not seen since July 2020. She paints a stark picture of the correlation between this level of the index and the unemployment rate, pointing out the disconnect in current trends. This is no ordinary dip in the market; this raises real fears for the future of our labor force. As she voices her concerns about potential cracks in the market, Megan echoes the need for caution as we navigate the second half of this year. Got a burning question or want to share your thoughts? Shoot us an email at podcast@verdence.com. This episode promises to be an enlightening exploration of the economic landscape, one you definitely won't want to miss!

Hello, welcome to Markets with Megan. This is Megan Horneman, the Chief Investment Officer for Verdence Capital Advisors. We're going to talk today about the ISM Manufacturing Index which came out, and this comes out at the first of every month. It could market-moving a indicator because typically, a level of this index below 50 indicates that the manufacturing sector in the US is in contraction territory. It also tends to be a leading indicator for a recession. This index was in contraction territory again for the month, so it's been nine consecutive months. There's only been two occasions going back in history where we've seen this index in contractionary for nine months or more and we haven't seen a recession.

What's more concerning is that every single component of the index is in contraction territory. We did see the weakest level in prices paid, which is actually good for inflation. We actually also saw a weak number in the backlog of orders, which can be good for the supply chain. But what's concerning in this report from the economic standpoint is the employment part of it. The employment fell the most of all of the components in the index for the month. It's at its lowest reading now since July of 2020, deeply in contraction territory at a level of 44.

Typically, if you go back to ever since this data series was put together. When we see this level between 40 and 45, where we are right now, the unemployment rate typically is close to 6%, not anywhere near what we're seeing right now. It just reiterates that there's more concern for the labor market going forward. More cracks are emerging and just another reason for us to continue to be cautious going into the second half of this year. That's all we have today. If you have any questions or comments, please feel free to reach out to podcastatverdencecom. Thank you.