December ISM Manufacturing, November Construction Spending

Positive Start for the New Year, Lack of Bad News Helps

  • The December ISM Manufacturing Index increased to 53.9 percent on strong production/employment.
  • Construction Spending for November increased by 1.2 percent with gains in private residential.

The first U.S. economic data of the New Year was positive news for financial markets as the ISM Manufacturing Index for December increased to 53.9 percent and construction spending for November ticked up by 1.2 percent. A bit of good news, in the absence of bad news out of Europe, has helped to start the trading year off with a bang, sparking a rally in equities. As we progress through January, U.S. data will continue to show a moderately improving economy through the end of 2011.  However, later in the first quarter we will begin to feel some of the drag from a weakening Europe. Add to that increased drag from constrained federal and state/local government spending, and likely less robust business investment spending, and the first half of 2012 still looks risk prone for the U.S. economy, with real GDP growth near two percent, uncomfortably close to stall speed. 2012 as a whole is shaping up to be a pivotal year for the U.S. economy. The unemployment rate is expected to continue to decline moderately, in part due to a drop in labor force rolls as unemployment benefits expire. Housing markets and house prices will feel a bit firmer in the second half of the year.  The presidential election will be, in large part, a referendum on fiscal policy, and may prove to be a reset for consumer and business confidence. So after a tempered first half of 2012, U.S. economic growth is expected to increase moderately through the second half of the year, like it did in 2011.

The ISM Manufacturing Index for December increased to a solid 53.9 percent as both the production and employment sub-indexes increased by 3.3 percent for the month.  Exports were still growing through December, up 1.0 percent according to the ISM. Manufacturing remains the backbone of the U.S. economy.  Healthy domestic private-sector demand for U.S. manufactured goods is expected and will be needed to overcome drags from abroad and from constrained U.S. government spending. Construction spending for November increased by 1.2 percent with gains in private residential construction activity.  Slow-to-moderate gains in the pace of residential construction are expected through 2012. Multifamily construction is coming back from the dead as vacancy rates tighten up in many areas and rents increase. Single-family construction will improve more slowly, weighed down by the exceptional affordability of existing homes.

Market Reaction: U.S. equities markets opened strongly. Treasury yields are up. Oil is up to $102.24/barrel. The dollar is down against the yen and the euro.

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