On May 4th we posted: “…the composite index is a fairly good leading indicator of the overall direction of the market, and not surprisingly so, since the reads from the manufacturing and service sectors tend to show up on the income statements a couple of months later. As you can see by the attached chart the composite index peaked in late 1999, and peaked again in 2005, however, the housing fueled speculative bubble kept the market going even though the underlying economy was weakening.
Currently, the index looks as if it may have peaked again at fairly high levels and without the liquidity injected hyper-drive of the past rally acting as a tailwind to the markets this time; it is highly likely that the current market will not be able to sustain continued higher prices in the face of declining economic activity.”
Today with the release of the Non-Manufacturing Business Activity Index combined with the sharp decline in the ISM Manufacturing PMI on Wednesday our composite index has plunged from 57.1 in April to 53.6 today. Yes, a number above 50 does show that the economy is growing but the deceleration in growth (the trend) is what is important here. If I am driving in my car and slam on the brakes I am still moving forward until I come to a dead stop – in other words, the economy doesn’t go from growth to recession in a month or two. The economy seen the brakes put on by the withdrawal of stimulus, the weight of the housing market and a weak consumer which keeps small businesses on hold as we discussed in our post this morning on the jobs report.
Most likely we have seen the peak, at least for the time being, in this current economic cycle, and will see more weakness persist as the government tries to extract itself from Quantitative Easing which has now reached its point of diminishing returns. Let me be clear, there is not now, nor has there been, any real organic, self-sustaining, economic growth up to this point. This is because the consumer is entrenched in a balance sheet recession that is still playing itself out and without further stimulus, in whatever form the Fed can muster, we will most likely be at much lower levels of economic growth in the next couple of quarters.