Today, the US Commerce Department released a report indicating that Gross Domestic Product rose by 3.5% in the third quarter of 2009. This represents the first quarter of growth in over a year. These facts, combined with the widely accepted principle that two consecutive quarters of negative GDP growth constitutes a recession and that this recession featured one of the sharpest quarterly GDP drops in over a quarter of century, indicates that the recession appears to be over and that it was a relatively long and painful one.
However, ISM’s Report on Business seems to say that it wasn’t so bad and it ended a while ago. Let me share a chart to illustrate a few points I’m going to make…
This chart shows GDP and ISM’s half-baked PMI-to-GDP correlation. If you look at the first circled quarter of datapoints, the GDP indicates that the economy was shrinking.
What did ISM say? That it was growing!
The second circled quarter of datapoints indicates that while the GDP was still shrinking, ISM said that it resumed growth.
Look between the circles. GDP shows a pretty severe decline, while ISM’s decline is much more shallow.
All in all, the GDP data indicates that the US was in a recession for at least a year. ISM said that the recession was a mere seven months long.
Only seven months long? A little ridiculous, isn’t it?
Now, it is OK for ISM to report its findings. I don’t have a problem with that.
What I do have a problem with is that false little statement that they include in every manufacturing Report on Business that says “the PMI…corresponds to a x percent increase/decreasse in real GDP annually.”
Let’s face it…ISM’s PMI does not correspond to change in GDP! The two circled segments indicate that ISM wasn’t even directionally accurate in two of four consecutive quarters! The numbers don’t lie!
The point? I urge ISM to discontinue using this phrase in their Reports on Business.
It’s not only unethical. When you consider the influence that the Report on Business has on the stock market and the net worth of stockholders – all major stock indexes fell between 2 and 3 percent on October 1, the day ISM released its last manufacturing Report on Business – it’s almost criminal!
For more reading on the weakness of the ISM Report on Business, see these links:
Caveat Emptor: Economic Indices Could Be Misleading You (November 30, 2006)
ISM’s PMI is BS (February 6, 2008)
The ISM Index Gets More Amusing By The Second (March 4, 2008)
Another ISM Index Contradiction (March 5, 2008)
Today’s GDP Release Leaves ISM With Egg On Its Face (October 30, 2008)
Is The ISM Report on Business Out of Sync With The Economy? (August 7, 2009)
To Your Career,
Charles Dominick, SPSM
President & Chief Procurement Officer
Next Level Purchasing, Inc.
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