The recent report from the Institute for Supply Management, which measures productions of goods in the manufacturing sector, showed slower growth in the month of June. Almost of all the components of the report showed declines from May. Of particular concern was the deceleration of new orders (dropping by 7.2%) and prices paid (dropping 20%).
Going forward, we expect further deceleration in manufacturing. The combination of a stronger dollar and slower demand coming from Europe should hit export orders moving forward. The overall level of ISM readings are consistent with GDP growth of 3%-plus. However, further declines in the data in the coming months could bring down growth in the second half of this year.
In order to the economy to have enough momentum going into 2011, economic growth needs to be humming along by the end of the year, including job gains of roughly 200,000 per month by the end of the third quarter. With today's payroll number showing a loss of jobs for last month, it is becoming more unlikely we will see significant job growth in the next few months.
At this point, the prospects for the economy are moving between a worst-case scenario of a relapse into recession (which is a low probability) to a best-case of sluggish, sporadic growth in 2011. Thus, the current decline in the markets is expected given this fundamental change. We have stated earlier this year that earnings expectations were probably too high and adjustments would be made in the second half of this year; which would could see in the coming months. It is likely the markets will remain in a trading range until signs are clearer as to where to economy and earnings growth is headed. Until there is further confirmation of the data, we should expect volatility to continue, with a good news/bad news driven market.
In the meantime, it is best to continue our defensive-minded approach as we have since the beginning of the year - holding more fixed income, income producing investments (utilities), and cash as we wait for the dust to settle and less cloudy days to appear.
Enjoy the long weekend!
